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r
~
RESEARCH ON THE "COST OF NON-EUROPE"
BASIC FINDINGS
VOLUME 5 PART B
I B --------
- ~ --
---
--
- ----
- - -====-- = ~ =
THE "COST OF NON-EUROPE"
***
* *
* *
* *
***
IN PUBLIC-SECTOR PROCUREMENT
Document
COMMISSION OF THE EUROPEAN COMMUNITIES
This publication was prepared outside the Commission of the European Communities.
The opinions expressed in it are those of the author alone; in no circumstances should
they be taken as an authoritative statement of the views of the Commission.
Cataloguing data can be found at the end of this publication.
Luxembourg: Office for Official Publications of the European Communities, 1988
ISBN 92-825-8647-2
Part A + Part B: ISBN 92-825-8648-0
Catalogue number: CB-P2-88-F14-EN-C
ECSC-EEC-EAEC, Brussels Luxembourg, 1988
Printed in the FR of Germany
RESEARCH ON THE "COST OF NON-EUROPE"
BASIC FINDINGS
VOLUME 5 PART B
EUROPE"

***
* *
* *
* *
***
IN PUBLIC-.SECTOR PROCUREMENT
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Document
COMMISSION OF THE EUROPEAN COMMUNITIES
This publication was prepared outside the Commission of the European Communities.
The opinions expressed in it are those of the author alone; in no circumstances should
they be taken as an authoritative statement of the views of the Commission.
ECSC-EEC-EAEC, Brussels - Luxembourg, 1988
Printed in the FR of Germany
- SS'i -
THE COST OF NON-EUROPE IN PUBLIC SECTOR PROCUREMENT
PART I I REPORT
WS ATKINS MANAGEMENT CONSULTANTS
Woodcote Grove Ashley Road
Epsom Surrey KT18 5BW
10524.01
10/36:87
- 555 -
CONTENTS
1. EXECUTIVE SUMMARY- see part A
2. IDENTIFICATION OF IMPORTANT SECTORS AND PRODUCTS
2.1 Product Reviews
2.2 The Price Effect List
2.3 The Restructuring List
2.4 Selection of Products for Analysis
3. PRICE COMPARISONS
Page
42
42
42
48
52
55
3.1 Objectives and Methodology 55
3.2 Practical Problems of Price Comparison 56
3.3 Data Sources 59
3.4 Comparison of Prices - General Comments 62
3.5 Savings Thresholds and Calculation of Savings
Factors 66
3.6 Comment on Products in Direct Price Enquiries 68
.. 55f> -
4. CASE STUDY 1: COAL
5.
6.
7.
4.1 Industry Structure
4.2 Competitiveness
4.3 Effects of Opening Up Public Procurement
4.4 Scenario
CASE STUDY 2: HEAVY FABRICATIONS (BOILERS AND PRESSURE
VESSELS)
5. 1 Industry Structure
5.2 Competitiveness
5.3 Economies of Scale
5.4 Effect of Opening Up Public Procurement
5.5 Scenario
CASE STUDY 3: TURBINE GENERATORS
6. 1 Industry Structure
6.2 Competitiveness
6.3 Economies of Scale
6.4 Effects of Opening Up Public Procurement
6.5 Scenario
CASE STUDY 4: ELECTRIC LOCOMOTIVES
7. 1 Industry Structure
7.2 Competitiveness
7.3 Economies of Scale
7.4 The Effect of Opening Up Public Procurement
7.5 Scenario
Page
90
90
90
92
93
95
95
100
100
102
105
107
107
110
113
116
117
119
119
124
125
127
129
- 557 -
8. CASE STUDY 5: MAINFRAME COMPUTERS
8.1 Industry Structure
8.2 Competitiveness
8.3 Economies of Scale
8.4 Effects of Opening Up Public Procurement
8.5 Scenario
9. CASE STUDY 6: SWITCHING EQUIPMENT
9.1 Industry Structure
9.2 Competitiveness
9.3 Economies of Scale
9.4 Effects of Opening Up Public Procurement
9.5 Scenario
10. CASE STUDY 7: TELEPHONE HANDSETS
10.1 Industry Structure
10.2 Competitiveness
10.3 Economies of Scale
10.4 Effects of Opening Up Public Procurement
10.5 Scenario
11. CASE STUDY 8: LASERS
11.1 Industry Structure
11.2 Competitiveness
11.3 Economies of Scale
11.4 Effects of Opening Up Public Procurement
11.5 Scenario
Page
130
130
133
135
135
137
139
139
145
147
151
152
153
153
155
156
157
158
160
160
163
163
164
165
- SSR -
Page
12. POTENTIAL SAVINGS IN PUBLIC EXPENDITURE 166
12.1 Introduction 166
12.2 Formulae Used in the Model 167
12. 3 Data Used 169
12.4 Hypothesis on the Change in Import Penetration 173
12.5 Base Case Calculations 181
12.6 Sensitivity Analysis 185
12.7 Caveats 187
12.8 Unquantified Effects 189
APPENDICES
I SPECIFICATION OF PRICE EFFECT LISP SAMPLE PRODUCTS
II CALCULATION OF TYPICAL SAVINGS THRESHOLDS AND
POTENTIAL SAVINGS
III THE CASE STUDY INDUSTRIES IN THE USA
IV ACKNOWLEDGEMENTS
V BIBLIOGRAPHY
192
198
238
276
279
- 559 -
LIST OF TABLES AND FIGURES
EXECUTIVE SUMMARY - see part A
Page
Tables
Table 2. 1 Evaluation of Products for Potential Benefits from
the Internal Market 43
Table 2.2 The Price Effect List 49
Table 2.3 The Restructuring List 50
Table 3.1 Average Prices of 'Eurostat' Standard Goods 1986 61
Table 3.2 Price of Sample Products to Public Sector Purchasers
(from direct enquiries) 63
Table 3.3 Potential Static ~ r i e Savings by Product 69
Table 3.4 Potential Price Savings for Digoxin 74
Table 3.5 Potential Price Savings for BEUC Basket of
Pharmaceuticals 74
Table 3.6 Potential Price Savings for Power Cables 76
Table 3.7 Potential Price Savings for Street Lamps 77
Table 3.8 Potential Price Savings for Fluorescent Tubes 78
Table 3.9 Potentia 1 Price Savings for School Desks 79
Table 3.10 Potential Price Savings for Office Desks 80
Table 3.11 Potential Price Savings for Filing Cabinets 80
- 560 -
Table 3.12
Table 3.13
Table 3. 14
Table 3.15
Table 3.16
Table 3.17
Table 3.18
Table 3.19
Table 3.20
Table 3. 21
Table 3. 22
Table 5. l
Table 5.2
Table 6. l
Table 6.2
Table 6.3
Table 6.4
Table 7 .l
Table 7.2
Table 8. l
Table 8.2
Table 8.3
Potential Price Savings for Uniforms
Potential Price Savings for Copier Paper
Potential Price Savings for Cement
Potential Price Savings for Opel Ascona
Potential Price Savings for Fiat Ducato
Potential Price Savings for VW Transporter
Potential Price Savings for Cardiac Monitor
Potential Price Savings for X-ray Machine
Potential Price Savings for Transformers
Potential Price Savings for Goods Wagon
Potential Price Savings for Telephones
Cost Structure in Boilers/Pressure Vessels Fabrication
Short Term Economies of Scale in Boilers/Pressure
Vessels
Ranking of Firms by Export Orders 1981-86 for Power
Generation Plant
Ranking of Heavy Electrical Engineering Firms
Cost Breakdown in Turbine Generator Manufacture
Short Run Economies of Scale in Turbine Generator
Manufacture
Page
81
82
82
84
84
85
85
87
88
88
89
l 01
l Ol
lll
112
114
115
Cost Structure of Some Locomotive Manufacturers 126
Short Run Economies of Scale in Locomotive Manufacture 126
Computer Equipment Suppliers to Europe: Market Shares
and Production 1986 131
Manufacturers Shares of the European Mainframe Market 131
Manufacturers Shares of the European Public Sector
Mainframe Market 136
- 561 -
Table 9.1
Table 9.2
Table 9.3
Table 9.4
Table 9.5
Table 9.6
Tab 1 e 10.1
Table 10.2
Tab 1 e 12.1
Table 12.2
Table 12.3
Table 12.4
Table 12.5
Table 12.6
Table 12.7
Table 12.8
Table 12.9
Tab 1 e 12.10
Table 12. 11
Main European CPE Switching Systems
CPE Digital Switches Installed in Belgium, France,
Germany, Italy and the UK (1987)
Public Switches to be Installed in 1987
Recent Mergers, Joint Ventures and Acquisitions in the
European Public Switching Industry
Cost Breakdown in Switch Manufacture
Short Run Economies of Scale in Switch Manufacture
Cost Structure in Telephone Handset Manufacturing
Short Term Economies of Scale in Telephone Handsets
Potential Savings Factors
Breakdown of Public Purchasing by Product Category
Assumed Public Sector Import Penetration Rates
Avera9e Import Penetration n t e ~
Public/Private Sector Intermediate Consumption
Implicit Private Sector Import Penetration
Change in Public Sector Import Penetration after "1992"
Base Case Estimate of the Static Trade Effect
Base Case Estimate of the Competition Effect
Base Case Estimate of the Restructuring Effect
Summary of Base Case Estimates of Total Savings
Table 12.12 Sensitivity Analysis
Table 12.13 Summary of Potential Savings
Tab 1 e I I. 1
Table I I. 2
Table II.3
Table I I. 4
Tab 1 e I I I. 2 . 1
Tab 1 e I I I. 3 . 1
Estimation of Savings Thresholds
Calculation of Potential Savings Factors
Calculation of Potential Savings - Summary
Hermes Model Factors
Comparison of US and EC Boiler Production
US and EC Production of Turbine Generator Sets
Page
140
141
142
148
148
149
156
157
170
172
176
177
178
179
180
182
183
184
185
186
187
204
219
234
235
244
246
- 562 -
Page
Table III.4.1 Comparison of US and EC Locomotive Industry 251
Table III.5.1 US Mainframe Computer Manufacturers 253
Table III.5.2 Comparison of the US and EC Mainframe Computer
Industries 255
Table III.6.1 Supplies of Switches to the USA 1984 257
Table III.6.2 Manufacturers' Sales of Digital Switches 261
Table III.6.3 Production of Digital Switches by Region 262
Table III.6.4 Comparison of Prices for Digital Switches 262
Table III.6.5 Trade Balances in Telecommunications Equipment ( 1984) 264
Table III.7.1 Breakdown of US Telecoms Market by Type of Equipment 266
Table III.7.2 Telephone Operating Revenues by Type of Carrier (USA) 268
III.9.1 EC US T3riff on S@l!rted Products 1987
?7C
-:-
Figures
Figure II. 1 A Simple Transport Cost Model
200
- 563 -
42
2. IDENTIFICATION OF IMPORTANT SECTORS AND PRODUCTS
2.1 Product Reviews
The purpose of this Section is to identify those products for which
there might be a significant static price effect (the "price effect
list"), and those industries for which there might be an important
economies of seale or restructuring effect (the "restructuring"
list). The prices of those products on the price effect list, and
the structure, costs and development strategies of industries on the
economies of scale list, are analysed in the following sections of
the Report.
Table 2.1 shows the results of a systematic analysis of supplying
sectors, summarised at the 2 digit NACE code level, but considering
products at the 3 digit level. The table shows two alternative
measures, using the French contract data and the input-output
analysis reported in Section 5.3 and 5.4 of the Part I Report, of:
* the share of the product in total public purchasing
* the importance of the public sector as purchaser of the whole
branch's output.
These data have been used to measure the relative impact of opening
up public purchasing on different product sectors.
2.2 The Price Effect List
The Price Effect List includes products which:
* have a large share in public purchasing, so that price
differences lead to significant savings
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* are tradab 1 e
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possibility of price differences existing (after allowing for
transport/trading costs)
* benefit from nationalistic public purchasing policies, the
removal of which might lead to increased trade by the public
sector.
The result of this analysis is the list shown in Table 2.2. This is
ranked in order of the importance of the product in public
procurement, as indicated by the analysis of total purchasing from
input-output tables and the French analysis of contracts (taking the
two digit NACE code share and estimating the share of the product
concerned within the whole 2-digit category), The list includes all
products of interest whose share is greater than 0.1% of all public
procurement.
The tot a 1 1 i st covers one third of a 11 pub 1 i c procurement. The
remaining two thirds are either non-tradable or weakly tradable so
that opening up public procurement will have no effect, or they are
commodities or similar products which are already freely traded.
2.3 The Restructuring List
Sectors on the Restructuring List are those shown in Table 2.3,
which:
* depend heavily on public sector purchasers
* have few dominant producers, because economies of scale are
important
T
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A

- 572 -
51
* are, therefore, often in a monopoly-monopsony or oligopoly-
oligopsony market environment, so that these are the sectors
where there are .. national champions .. , and which governments
are driven to favouring in order to protect jobs, guarantee
security of supply or promote innovation and investment.
Many of these products are
11
0ld friends .. , cited in previous studies
on public procurement. They can be divided into two broad groups:
* declining or static industries of strategic importance, for
which loss of business might lead to closures:
- coal
iron and steel tubes; special steels
heavy steel fabrication
power generation equipment
csnipbuilding
railway rolling stock.
* strategic new technologies requiring heavy support for R&D:
nuclear fuel processing
- computers
telecommunications
- optoelectronics, specifically lasers
aircraft
avionics.
This classification is only loose: there are high technology
products and heavy R&D in segments of the mature industries 1 ike
power generation, naval shipbuilding and high speed railway
locomotives.
- 573-
52
2.4 Selection of Products for Analysis
2.4.1 Case Studies
Some of the industries in the Restructuring List are defence
suppliers and cannot really be researched adequately within the
present study. The sharing of defence equipment markets and
harmonisation of defence standards is being tackled within NATO and
by the Independent European Programme Group (IEPG), which fa 11 s
outside the scope of the European Communities internal market
programme.
These sectors have not been considered in detail:
* naval shipbuilding
* aircraft
* avionic<5.
Nuclear fuel processing is also an area not susceptible to analysis
by case study interview, and has not been included in detailed
studies in Part II.
Furthermore, the two subsectors of the stee 1 industry have very
little weight in total purchasing and have not been included.
This leaves the following list of sectors for Case Studies, covering
their economies of scale, intra-community price differences, and
scenarios for restructuring in the internal market:
* coal
* heavy steel fabrication (power station boilers/nuclear
pressure vessels)
* turbine generators
* electric railway locomotives.
* mainframe computers
- 574 -
* central public exchange (CPE) switching equipment
* telephones
* optoelectronics (lasers)
53
These products cover the critical supply products to the important
purchasing sectors of Power Generation (coal, heavy fabrications,
turbine generators), Telecommunications (CPE switching, telephones,
lasers), and Transport (electric locomotives).
2.4.2 Price Investigations
A 11 of the products on the case study 1 i st are a 1 so on the price
effect list, and the price differences have been investigated in the
case study interviews.
Some of the product groups on the price effect 1 i st consist of a
diversity of prnrlucts} with nn dominant standard products for which
meaningful price comparisons could be made - namely broadcast
equipment, HVAC equipment, and
11
0ther mechanical engineering .. , which
is plant and equipment for a variety of industries.
Those products with weight of 0.1 percent _or less of total public
procurement will have no significant impact, and have been
investigated on an individual basis.
This leaves the following product groups for which the prices paid
by the public sector and offered by suppliers have been investigated
in the five study countries:
* pharmaceuticals
* cars and vans
* electrical office equipment
* power cables
* street lighting
* office lighting
* school desks
* office desks and furniture
- 575 -
* filing cabinets and shelves
* uniforms
* paper
* cement.
54
In addition, the following products which are predominently public
sector purchases, but are volume purchases with definable typical
products, have been the subject of a price investigation.
* electro-medical equipment (X-ray machines/cardiac monitors)
* telephones
* railway wagons
* electrical transformers.
The typical product definitions selected are shown in Appendix I.
(Where possible these are product specifications used by Eurostat
for collection of price datCI for of P'-'rC'hi'lc;i11g
parities.) The analysis of prices is discussed in the following
section of the Report.
- S7o -
55
3. PRICE COMPARISONS
3.1 Objectives and Methodology
This section sets out the basic data for estimating the static price
advantage from opening up public procurement for the products
selected in the
11
price effect .. list in the previous section of the
report. These are products with significant levels of public
purchasing, and represent those groups of products for which a
priori it is likely that potential savings exist.
The approach consists of:
* collecting data on prices of similar products, in the five
study countries, from suppliers and from purchasers
(subsection 3.3)
* estimation of the savings threshold which foreign suppliers
prices must exceed, in order to cover the additional costs of
trading (subsection 3.5 and Appendix II)
* calculation of the apparent potential price saving (subsection
3.6 and Appendix II)
* consideration of special factors which might prevent the
apparent savings from being realisable.
The apparent potential savings are summarised in subsection 3.7.
The findings from these price comparisons have been taken together
with those from the case studies set out in the following sections
of the report. The static price savings for the sample products
have then been generalised to the 2-digit NACE level and the gross
potential savings estimated.
577 -
56
Some of the conceptual and practical problems of such price
comparisons are set out in the following subsection 3.2.
3.2 Practical Problems of Price Comparison
The approach adopted leads to a good indication of the order of
magnitude of total potential savings to be expected,
is based on a necessarily limited sample of
observations. It cannot of course be concluded with
even though it
products and
certainty that
any specific purchaser or specific country could make the potential
savings estimated for any particular product. It is a stochastic
analysis, which gives a good estimate of the aggregate effect,
although the errors for individual product groups may be quite
large. By basing the total estimates an analysis of over 40
products over the whole spectrum of supplying sectors, the margin of
error in the total is reduced.
For individual products, statistically reliable price comparisons
cannot be made without an enormous amount of data, which within the
context of this study it would be impossible to collect and analyse.
For specific products, reliable comparisons cannot be made in most
cases, for a whole series of reasons:
* The distribution of prices within a country: Products which
have a 1 arge number of pub 1 i c sector buyers (e.g. common
consumable items like cleaning materials, light bulbs, food,
stationery) exhibit wide differences of prices between buyers.
A 1982 report on local authority purchasing in the UK showed
ranges of 3:1 for some products, and ranges of 2:1 for almost
all products. This is due to differences in lot size,
frequency/dispersion of delivery, the efficiency of the
purchasers, and the state of the market at the moment of
ordering. There are probably a 1 so wide variations in the
specification of the product normally supplied to meet a given
- 578 -
purchase specification; as noted below.
small number of prices in any country
misleading information.
57
Observation of a
can give quite
Products which are infrequent purchases (power stations,
weapons systems) are a 1 so subject to the influences 1 i sted
above and observation of a particular price does not
necessarily reflect the underlying cost/price relationship.
It should be recalled that even for consumer goods, where
markets are much more transparent and competitive, very wide
intra-country price differences can exist, both across
regions, and between different types of distribution outlet,
and of course between differentiated brands.
* Standards/quality/specification: These vary even for standard
items like detergent oowders. For works contracts, services,
and non-standard items like defence equipment, the
specification documents may run into hundreds of pages, and
reliable comparisons, while theoretically possible, would in
some cases be impracticable, and in most cases subject to
inaccuracies which are likely to be greater than the
underlying cost differences. Therefore, such detailed
comparisons are not considered feasible for items which are
highly differentiated (and in many cases, unique).
Even for products for which a fairly rigid specification can
be given (such as light bulbs, filing cabinets, electrical
transformers, paper) there can be very considerable product
differentiation, particularly as regards quality, as well as
less measurable aesthetic differences, which can support quite
significant price differentials.
* Life cycle costs: Even for comparable product
specifications, differences in initial costs may be due to
differences in product performance, in terms of maintenance
costs, product life, and operating costs. In evaluating
579 -
58
tenders, purchasers ought to have se 1 ected the product with
the lowest life cycle cost. Competitive products may then
have very different initial costs.
* The cost of non-traded inputs: Part of any real cost
difference between items is likely to be due to the difference
in the cost of non-tradable inputs such as land, local
building materials and labour, rather than due to the
Non-Europe barriers. This is particularly the case with works
contracts, where it is really only the project management and
professional services which can be traded - and then subject
to language and other natural limitations which are outside
the scope of the present internal market programme.
Comparison of loca 1 prices te 11 s nothing about the scope for
trade or potential price changes.
* Transport coste;: Jf the above estirn:}tion are
overcome, and a valid comparison of local prices has been
made, the cost of transport and of trading between each pair
of countries (costs of representative, insurance, taxes,
communication etc.) have to be estimated in order to assess
the possibility of trade and hence the potential price impact.
To obtain precise estimates of the mark-up for specific
supplies to specific customers would be enormously time
consuming, if data were available. Order of magnitude
estimates are made in the analysis which follows.
* Fluctuating exchange rates: Short term price differentials
exist as a result of exchange rate fluctuations, particularly
between the pound and EMS currencies. Where exchange rates
are floating, public sector purchasers would probably not be
in a position to take advantage of observed price differences,
because of the exchange risk inherent in long term contracts.
This is a different barrier to trade; it is not nationalistic
public purchasing.
- 580 -
59
* Discounts and bonuses: Many contracts include incentives for
timely delivery or other supplier performance factors.
Contract prices do not therefore reflect outturn costs.
Prices quoted by suppliers in response to the enquiry carried
out by the Consultants may also be misleading, since in many
industries there is a system of list prices on which
significant discounts are given to dealers and large
customers: these discounts are treated as highly sensitive
commercial information and so are very rarely revealed.
* Contracts with mixed goods: A 1 arge proportion of supply
contracts, perhaps the majority, are let for a list of mixed
goods, for which individual prices are not quoted. In these
cases price comparisons using actual observed contract prices
are impossible. This proved to be the case with most of the
common supplies contracts included in the contract database.
3.3 Data Sources
Several approaches have been considered in order to obtain
comparable price data. These include:
* data for
1
shopping 1 i st I i terns from the contract database
analysed in the Part I Report
* the price indices deve 1 oped by Eurostat for the purpose of
calculating purchasing power parities
* direct price enquiries to purchasers and suppliers
* other studies.
3.3.1 The contract database
The contract questionnaire/shopping list approach did not work out
as well as expected as a means of obtaining comparable price data.
It forms an invaluable database for looking at the pattern of public
581 -
60
procurement, and has revealed information about the types of
contracts let which would not otherwise be available. As a means of
comparing prices, however, a number of problems are evident:
* there has been considerable resistance from many authorities
to providing the manpower to extract information needed for
the questionnaires. Many authorities do not have the data on
past contracting activity easily available. The size of the
database therefore, although large (over 4,000 records) does
not have a large number of observations on any one product
* there is particular difficulty in obtaining price data, and in
one member state is protected by law
* in many cases the product specification information given in
the questionnaires is insufficient to calculate a unit price
which r ~ ~ be compared with other contracts.
3.3.2 Eurostat data
Eurostat price data is collected to calculate purchasing power
parities. It mainly covers consumer goods and equipment goods,
however, with very few products used by the public sector. The 1986
prices of those products which are of interest are shown in
Table 3.1. These are the average of price observations in various
types of distribution outlet in 1985, net of duty and VAT and
converted in ecus at the mid 1986 exchange rate.
3.3.3 Direct enquiries
In view of the inadequacy of the two sources of data above, which do
not cover all the products identified as of prime interest in the
'price effect list' in Section 2, it became necessary to make direct
enquiries of purchasers and suppliers in the five study countries.
This was done by:
- 582 -
61
TABLE 3.1 -AVERAGE PRICES OF
11
EUROSTAT
11
STANDARD GOODS 1986
(Ecus net of tax and duty)
Germany France Italy UK
I
Belgium
I
Metal Office Furniture
I
Fixed armchair 162 133 100 141
I
118
Storage cabinet 354 364 348 314
I
300
File cabinet 332 388 462 252
I
317
Shelf 85 86 57 52
I
118
Swivel chair 272 224 224 167
I
252
I
Office Machinery
I
Typewriter I 887 1 ,035
1 '292 1 '279 I
892
Calculator I 131 145 191 100
I
113
Calculator II 17 24 28 14
I
Paper Shredder 840 805 1,312
- I 853
I
Telephone 103 87 53 29
I
60
I
Vehicles
I
Average of car 10,367 10,946 11,619
11 '973 I
10,025
Van b6 14,463 12,409 14.909 14,840
'
12,188
Van b7 10,158 12,269
1l '156
I
11 '120
3,134
I
Bus d8 178,237 199,884 228,174
I
176,749
Bus dl4
11 '762
16,133
- I
14,261 10,684
I
Electrical Equipment
I
Transformer I 3,331 3,328 2,918
I
4,395 2,849
Electro/graph
1 '300 1 '364 1 '435 I
1,218
1 '413
1* Pharmaceutic a 1 s
1 '513 682 716
1 '213
794
I
Source: Eurostat
.'t Note
.
Source for pharmaceuticals: BEUC
583 -
62
* compiling a set of sufficient specifications to define the
product, order size and deli very method of each of the
products selected for price comparison (see Appendix I)
* recontacting purchasing authorities which had provided data to
the contract database,
price for the specified
other details)
and asking for their current purchase
goods (without naming suppliers or any
* carrying out a market research survey in the five countries,
to identify suppliers, and then obtain quotations for the
specified goods from three suppliers (where three exist) after
discount to a typical public sector purchaser.
This approach does not entirely overcome the problems identified in
sub-section 3.2, since there can still be considerable product
differ-entiat ion ... dthi n the specification adopted.
also suppliers will only quote their undiscounted price.
Nevertheless, the data_are believed to be considerably more reliable
than the other sources quoted above and are shown in Table 3.2.
3.4 Comparison of Prices - General Comments
The data shown in Tables 3.2 and 3.3 all indicate that there are
indeed very significant price differences recorded between
countries.
It is notable that for the products in the direct price enquiries
there are significant price differences between quotes within
countries.
The non-differentiated products have price ranges between individual
quotes of between 1.3 and 1.8 to l. This range of prices is similar
to the range of prices observed for non-differentiated products
between local authorities in the UK.
- SR4 -
63
TABLE 3.2 - PRICES OF SAMPLE PRODUCTS TO PUBLIC SECTOR PURCHASERS (FROM
DIRECT ENQUIRIES)
(ECUs per unit, net of taxes 1987)

1er !

.:.
Suool1er
.
'
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179
- S8S
- 586 -
65
For differentiated products the observed range of quotes is much
larger (around 4:1) and the ratio of prices actually paid ranges
from 1.2 to 4.6 to 1.
These general observations lead to a powerful conclusion: there is
very considerable scope for savings in public purchasing in these
products, but not only a result of increased international trade.
Increased efficiency and transparency in pub 1 ic purchasing ought
also to lead to a reduction in the dispersion of prices, and to
overall lower prices, within each country.
Increased standardisation might also lead to reduced prices (by
increasing competition as well as by adopting the most
cost-effective specification), but there will always be
differentiated products to meet specific local requirements.
Uniforms, despite their name, are a good example. They need to
differentiate the personnel of different be to
the mode of work and to the climate.
The key question needs to be asked: if it is a product used by both
the public sector and the private sector, why should the public
sector be able to make a saving through trade which the private
sector has not taken advantage of? Why should public purchasing
offices be better traders than professional traders are?
A priori, public sector savings would be expected where either:
* there is no significant private sector trade, such as railway
wagons, street lamps, or any of the products in our economies
of scale case study list, (power generation equipment, coal,
telecommunications equipment, railway equipment) or
* the public sector and private sector markets are separated to
such a degree that the public sector pays a higher price than
the private sector in which case it is essentially a different
public sector product, (such a case might occur for example in
computers for specific applications) or
587 -
66
* there are restrictions on private sector trade which a
powerful central public purchaser could overcome - such as
exclusive distributorships on branded goods like cars, or
consumer and medical electrical goods.
It is useful to see from Table 3.2 to what extent the public sector
pays higher prices than the open market, as indicated by the
suppliers' offer prices.
Belgium
France
Germany
Italy
UK
Number of products for which the public
sector purchase price is higher/lower
than the mean observation
Higher Lower
7 9
6 7
8 10
7 4
3
15
31 45
There is no evidence tnat on the whole the public sector pays higher
prices than the private sector.
3.5 Savings Thresholds and Calculation of Savings Factors
To estimate what savings might be made it is necessary to assess for
each product what level of price differentials would exist in the
absence of any public purchasing restrictions.
will continue to exist because of:
Price differentials
* transport and trading costs (local representation, publicity
and promotion, travel, procurement costs etc.) which exist
because of geographical separation even in a barrier-free
internal market
* 'normal' product differentiation due to differing local
requirements, circumstances, tastes, heritage, or the simple
demand for diversity of products and suppliers.
- 588 -
67
* other barriers to trade, which may be removed as a result of
the Internal Market Programme, but the benefits of whose
removal cannot be attributed to the opening up of public
procurement - for example, border costs, standards, and in
some cases .. irremovable .. barriers such as language or the
heritage of infrastructure standards
* exchange rate and trading risks.
To assess the potential saving for each of the sample products, an
estimate is first made of the price difference which would need to
be offered by a foreign supp 1 i er in order to overcome the above
effects, and make it worthwhile for a purchaser to buy from abroad.
This price differential will be called the .. savings threshold ...
The savings threshold is calculated as a percentage of the price
from (I local c;upplier, .Appendix II shows estimates for typical
contracts for each of the products on the price effect list. The
savings threshold is sensitive to the size of contract, the exact
locations of supplier and purchaser, delivery requirements and the
characteristics of the product. In general, the threshold will be
lower for large contracts because of relatively lower transport and
procurement costs. The following analysis is based on typical
contract sizes and assumptions about procurement costs, linked to a
simple transport model for costs between main industrial regions in
each of the five countries (Brussels, Paris, Frankfurt, Milan, and
London)
In the estimation of savings thresholds no account has been taken of
other barriers to trade, nor of the effects of product
differentiation or different national standards. Our estimates of
the potential price savings are therefore likely to be overestimates
of what would be achieved in practice, because:
* part of the observed price differences is likely to be due to
differences in quality and specification
589 -
68
* other barriers prevent the achievement of the apparent
potential savings.
In the base case calculations, the potential savings for the typical
public sector purchaser of a product is calculated, for products in
the Atkins direct price enquiries, by comparing the mean price in
each country, with the lowest available mean price. This mean is
the average of prices quoted by both supp 1 i ers and purchasers. By
comparing mean prices, the focus is on the difference between
countries, of prices of a re 1 at i ve ly
1
standard
1
product. The
EUROSTAT data are a 1 ready mean prices of sever a 1 quotations. The
difference between the price advantage and the savings threshold
gives the apparent potential saving for each potential supply
country. The highest saving from among the four potential supplying
countries gives the maximum apparent potential saving. The detailed
calculations are shown in Appendix II. The results are summarised
in Table 3.3.
3.6 Comment on Products in Direct Price Enquiries
In this section some further comments are offered on the potential
savings indicated for products covered by the Atkins direct price
enquiries.
3.6.1 Pharmaceuticals
Two pharmaceutical products were selected for the direct price
enquiries: digoxin and paracetamol. The products are not
1
typical
1
,
but do illustrate the general conclusion that there are often
startling differences in drug prices between countries.
Digoxin is a drug used mainly in hospitals, for heart patients;
paracetamol is a common pain killer both used in hospitals and sold
as a retail non-prescription drug. Both are sold as generics and as
branded products. Both the drugs selected happen to show the UK as
the low price supplier (see Table 3.4). A different selection of
drugs would be likely to show lowest prices occurring in a different
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- 594 -
73
country. Paracetamol is an extreme case. This is one of the most
commonly used analgesics in the UK, and largely replaced aspirin
many years ago as the recommended drug because of fears of stomach
damage caused by aspirin. In other EC countries, however,
paracetamol is little used, and in Belgium is almost unknown.
The pharmaceutical industry has very complex pricing policies, since
the marginal costs of production are very low compared with both the
direct fixed costs of production, and the large overheads for R & 0,
testing, marketing. Enormous price differences can therefore exist
for particular products. A perfectly competitive market in which
prices were driven down to marginal costs would be unsustainable
since profits would be negative and there would be no contribution
to research and development. There are therefore approved 1 i sts,
with differing degrees of government control over prices. France,
for example, exerts control on drug prices to keep them low; Germany
drug to set the prices.
The price enquiry data has not been used for estimation of potential
savings. Instead, data has been used from a 1987 report by the
Bureau Europeen des Unions de Consommateurs (BEUC), "A Common Market
in Medicines?" This report gives the price of a basket of drugs in
all European countries and is therefore more representative. It
shows a ratio of about 2. 5: 1 in prices between the highest price
country (Germany) and the lowest (Portugal). The prices and
potential savings for the five study countries are shown in
Table 3.5.
Hospitals and health authorities may buy their bulk supplies of
drugs by negotiated contract direct from the original manufacturer
at negotiated prices (for a range of drugs) , and buy 1 ow vo 1 ume
supplies and top-up quantities from a wholesaler, at list prices
less a discount (7 percent in the UK from one wholesaler). In these
circumstances there is little opportunity for open tendering
procedures. International competition ought to operate through
wholesalers, but this does not in practice occur. Wholesalers
sometimes get approval from the manufacturer to match a particular
contract price. The wholesaler could sometimes make a profit by
595 -
74
TABLE 3.4 - POTENTIAL PRICE SAVINGS FOR DIGOXIN AND PARACETAMOL*
(Ecus per 200 tablets, 1987)
I
Belgium France !Germany! Italy UK
I
I I I
I
a) Digoxin (200 tablets)
I I
I I
Mean Price 4.50 8.01
I
6.41 10.61 2.58
I
I I
Potential Supplier UK UK
I
UK UK -
I
I
Price Difference 43% 68%
I
60% 76%
I
Threshold 59% 41%
I
74% 70%
I
Potential Saving 0 26%
I
0 6%
I
b) Paracetamol (10,000 tabs)
I
I
Mean Price 561 635
I
302 833 38
I
Potential Supplier
IIV 'IV
I
l!l/
U''
V" u" I
"
"
I
Price Difference 93% 94%
I
87% 95%
I
Threshold 11% 12%
I
31% 20%
I
Potential Saving 82% 82%
I
57% 76%
I
Source: Appendix Table II.2
*Note:
These data are not used in estimation of potential savings.
TABLE 3.5 - POTENTIAL PRICE SAVINGS FOR BEUC BASKET OF PHARMACEUTICALS
Belgium France !Germany! Italy UK
I I
Price (ecu)
1 '514
683
I
716
I 1 '214
795
I I
Potential supplier F F
I
F
I
F F
I I
Price advantage 14% -
I
55%
I
5% 44%
I I
Threshold 5% -
I
3%
I
7% 3%
I I
Potential Saving 9% -
I
52%
I
0% 40%
I I
Source: BEUC 1987 and Appendix Table II.3
- 596 -
75
buying from wholesalers in other EC countries where the price is
lower - even by reimporting r u g ~ exported from the home country in
national packaging. One UK wholesaler said he doesn't rock the boat
because the effort and paperwork i nvo 1 ved is very costly and there
is a risk of getting non-authentic supplies; also foreign packaging
is not usually acceptable to clients - even when there is 10:1 or
more difference in prices. (In practice, a wholesaler who tried
parallel importing would probably find his national suppliers
refused further business with him).
Unbridled competitive tendering in this situation would be highly
undesirable. Undoubtedly prices would be forced down. This
competition, however, would not necessarily drive out inefficient
producers or make existing producers more efficient. It would
probably impinge on research and development and on safety
standards.
Possibly, harmonisation of different countries' drug lists would
lead to economies of scale and more orderly markets. This is not a
direct result of more open public purchasing, although it might be a
necessary condition for wider tendering with adequate safeguards.
Prices would probably settle at a level below the present average,
but not at the level of the lowest.
It nevertheless remains true that in theory, at present, purchasers
could make enormous savings on some drugs by buying from overseas in
sufficiently small quantities not to upset the system.
3.6.2 Power cables
Power cables are a standardised product, with strict specifications
laid down by the power utilities. The standard cross:-sections and
number of strands vary between countries, but the manufacturers can
quite easily switch production between different specifications. It
is a competitive industry with a mature technology.
597 -
76
The observed price differences are of the order of 20 percent (see
Table 3.6). The price is usually linked to a specified steel and
aluminium price. Different base dates or material sources could
account for a large part of this difference.
TABLE 3.6 - POTENTIAL PRICE SAVINGS FOR POWER CABLES
(Ecus per 10 km, 1987)
Belgium France I Germany I Italy
I I
Mean Price 28876 20199 19450 20157
Potential Supplier UK UK UK UK
Price Difference 33% 5% 1% 5%
Threshold 7% 9% 12% 17%
Potential Saving 27% 0 0 0
UK
19226
Source: Appendix Table 11.2
Transport costs are high, and quality assurance very important. No
significant savings are indicated, except for Belgium (but based on
only one suppliers price which may be erroneous).
3.6.3 Street lamps
The product specification chosen (from the Eurostat database) was
only familiar to one producer in Belgium and one in the UK. Street
lamp specifications vary considerably, and it is not known how close
the specifications are in some cases. The highest price quoted (for
Germany) is actually for a much higher specification, heavier duty,
complete assembly with mast and control gear - probably increasing
the cost by four or five times the given specification.
- 59R -
77
In view of this great variability no firm conclusions on relative
savings can be drawn from the data. It would appear, however, that
there cou 1 d be economies from greater standardisation of street
lighting types (see Table 3.7).
TABLE 3.7 - POTENTIAL PRICE SAVINGS FOR STREET LAMPS
(Ecus per item, 1987)
Belgium France I Germany I Italy
I I
Mean Price 286 260 193 123
Potential Supplier UK UK UK UK
Price Difference 75% 73% 63% 42%
Threshold 32% 33% 38% 50%
Potential Saving 43% 39% 25% 0
I
UK
I
I
I
71
I
I
- I
I
- I
I
- I
I
- I
Source: Appendix Table II.2
3.6.4 Fluorescent tubes
The standard lengths and wattages of fluorescent tubes vary between
countries. Prices have been taken for either 65W (F, D, I) or BOW
( B, UK) .
The prices show a marked difference, with prices relatively high in
the UK, Belgium and Italy (3 to 5 ecus) and low in France and
Germany (1 to 2 ecus). There seems to be no obvious technical
reason for this difference. It is likely, however, that sourcing of
supplies is restricted by the design of light fittings. The cost of
transport is relatively high, because of the high volume/cost ratio
and breakages. It may be that the high priced tubes are imported.
Because fluorescent tubes are a low value product with small order
sizes, the savings threshold is very high. This gives no potential
savings (see Table 3.8).
- 599 -
TABLE 3.8 - POTENTIAL PRICE SAVINGS FOR FLUORESCENT TUBES
(Ecus per item, 1987)
Belgium France I Germany I Italy
I I
Mean Price 3.19 1. 50
I
1. 71 4.35
I
Potential Supplier F
- I
F F
I
Price Difference 53%
I
12% 66%
I
Threshold 82% - I
148% 69%
I
Potential Saving 0 - I 0 0
I
78
UK
3.27
F
54%
81%
0
Source: Appendix Table II.2
3.6.5 School desks
There is a r t ~ o of nearly 3:1 between the highest and lowest mean
country prices, and 4.6:1 between individual quotes. There are
differences in construction methods between products, and hence
probably major differences in product life as well as appearance.
Belgium and Germany appear to be high price countries. In France,
suppliers quote high prices, but the price paid by UGAP (the
Government central purchasing agency) is low. The reverse applies
in Italy, but the purchasing authorities questioned may have been
exceptional. The UK is the low price country for both quotes and
price paid.
The cost of school desks is low and transport costs would be high -
comparable to the ex-works price for long distances. The only
potential for trade is likely to be in border areas. The supplier
is also frequently expected to provide a repair service, so there is
a strong incentive for local purchasing. With the savings
thresholds estimated there is no potential saving (see Table 3.9).
- 600 -
TABLE 3.9 - POTENTIAL PRICE SAVINGS FOR SCHOOL DESKS
(Ecus per item, 1987)
Belgium France I Germany I Italy
I I
Mean Price 49 45 69 31
Potential Supplier UK UK UK UK
Price Difference 50% 47% 65% 21%
Threshold 70% 94% 103% 374%
Potential Saving 0 0 0 0
79
UK
24
Source: Appendix Table II.2
3.6.6 Office desks
Office arc a much higher value product than desks, so
the transport costs are less of a barrier. There is a considerable
private sector trade in office furniture, mainly because of design
differences. This degree of differentiation is reflected in a 4.2:1
range of price quotes, although there is only 1.7:1 range of prices
paid.
In all cases it appears that the public purchaser gets desks at
below the price offered by other suppliers. It can be seen from
Table 3.10 that the public purchasers would be able obtain only
small savings from the sampled suppliers in any other country in
spite of the range of prices (unless present discounts were
available from overseas suppliers.) Since the savings threshold is
high, due to high transport costs, there is no potential saving,
(except a possibly spurious result for Germany).
For Eurostat data on office chairs see Appendix II.
- 601 -
TABLE 3.10- POTENTIAL PRICE SAVINGS FOR OFFICE DESKS
(Ecus per item, 1987)
Belgium France I Germany I Italy
I I
Mean Price 343 367 445 174
I
I
Potential Supplier I I I
- I
I
Price Difference 49% 53% 61%
- I
I
Threshold 88% 74% 48% - I
I
Potential Saving 0 0 13% - I
I
80
UK
303
I
43%
129%
0
Source: Appendix Table II.2
3.6.7 Filing cabinets
Filing cabinets show a similar to de'Sks, b!..!t there
are some potential savings, indicated in Table 3.11. For further
Eurostat data on filing cabinets, storage cabinets and shelves, see
Appendix II.
TABLE 3.11 - POTENTIAL PRICE SAVINGS FOR FILING CABINETS
(Ecus per item, 1987)
I
Belgium France I Germany I Italy UK
I
I I I
I
Mean Price 230 234
I
341 316 129
I
I I
Potential Supplier UK UK
I
UK UK
- I
I I
Price Difference 44% 45%
I
62% 59% - I
I I
Threshold 26% 32%
I
36% 62% - I
I I
Potential Saving 18% 13%
I
26% 0
- I
I I
Source: Appendix Table II.2
- 602 -
81
3.6.8 Uniforms
The vari abi 1 i ty of materia 1 s quoted is 1 arge and probably accounts
for most of the price variations observed. Transport costs would be
low, but trading costs could be very high if order size is low. The
assumed 13 percent saving threshold for large orders indicates
potential savings of up to 50 percent for some countries (see Table
3. 12).
It is clear, however, that in practice such savings are highly
unlikely to be achieved, since the uniformed services of any
country, particularly the armed services, would not accept foreign
uniforms.
TABLE 3.12- POTENTIAL PRICE SAVINGS FOR UNIFORMS
(Ecus per item, 1987)
I I
Belgium France I Germany I Italy
I I
UK
Mean Price 205 125 79
I
147 95
I
Potential Supplier FRG FRG
- I
FRG FRG
I
Price Difference 61% 37%
- I
46% 17%
I
Threshold 9% 13%
- I
12% 17%
I
Potential Saving 52% 24%
- I
34% 0
Source:
3.6.9
I
Appendix Table 11.2
Copier paper
Paper is a commodity, already fairly extensively traded. The spread
of quotes is quite low, at 1.8:1, but for bulk contracts purchasers
would probably seek quite small savings. Transport costs are
probably only around 10 percent of the offer price, and a typical
savings threshold is 19 percent.
This indicates some potential savings of up to 16 percent as shown
in Table 3.13.
- 603 -
TABLE 3.13- POTENTIAL PRICE SAVINGS FOR COPIER PAPER
(Ecus per 500 sheets, 1987)
Belgium France !Germany! Italy
I I
Mean Price 3.35 4. 12 4.44 2.91
I
I
Potential Supplier I I I - I
I
Price Difference 13% 29% 35%
- I
I
Threshold 29% 23% 18% - I
I
Potential Saving 0 7% 16% - I
I
82
UK
3.42
I
15%
35%
0
Source: Appendix Table II. 2
3.6.10 Cement
Cement is also a commodity, but the public sector is not a very
significant purchaser (most construction being done by contractors;
cement may be mainly bought for individual contracts which have free
issue materials). Transport costs are very high, so, excluding
'dumping' which is sometimes a characteristic of the cement market,
there are no potential savings indicated (see Table 3.14).
TABLE 3.14- POTENTIAL PRICE SAVINGS FOR CEMENT
(Ecus per tonne bulk delivery, 1987)
Belgium France !Germany! Italy
I I
Mean Price 65 69 72 52
I
I
Potential Supplier I I I
- I
I
Price Difference 21% 25% 29% - I
I
Threshold 172% 149% 115% - I
I
Potential Saving 0 0 0 - I
I
Source: Appendix Table II.2
UK
67
I
23%
214%
0
- 604 -
83
3.6.11 Vehicles
Vehicle prices, with discounts,
types. Additional price data for
types were also obtained from the
have been collected for 3 vehicle
1986 for a large number of vehicle
Eurostat price data.
Vehicle prices have levelled out in recent years. The data shows
relatively high prices in Italy in June 1987, and low prices in
Belgium and UK (see Tables 3.15 to 3.17).
It should be noted that in comparing vehicle prices, specific models
have been compared. Within each country a very free and competitive
market exists, and consumers have very good information on prices
and performance factors, so that the producers and distributors set
prices which fairly accurately reflect the consumers' assessment of
relative vnlues, (which rnny, 1-Jowever, include preference factors for
non- quantitative aspects such as scarcity and national pride). If
public purchasers buy only from national manufacturers they are
restricting their field of choice from within the spectrum of
products on offer, but given the wide range of models offered by all
the major manufacturers this has only a marginal effect on
optimality of their choice. They would not make any significant
gain by buying a foreign make from a national dealer. (In fact most
data on fleet operations show that makes are more cost
effective because of the lower cost of spares, which is largely
determined by stock holding costs.)
The price analysis here measures the extent to which an efficient
large buyer could beat the trade barriers ie. exclusive
dealerships and complicated export formalities which keep
differentials between the average car prices in different countries.
This is one of the potential benefits of public purchasing power,
rather than a cost of nationalistic purchasing.
- 605 -
84
There is little saving opportunity on single orders, but for large
purchases there are savings up to 16 percent indicated by the direct
price enqu1r1es. Rather larger differentials existed in 1986, as
shown by the Eurostat data (see Table 3.3).
TABLE 3.15- POTENTIAL PRICE SAVINGS FOR OPEL ASCONA
(Ecus per vehicle, 1987)
Belgium France I Germany I Italy
I I
Mean Price 6701
I
7978 7810 7933
I
Potential Supplier
- I
B B B
I
Price Difference
I
16% 14% 16%
I
Threshold -
I
5% 5% 7%
I
Potential Saving
- I
11% 9% 9%
UK
I
7632
I
I
B
I
I
12%
I
I
5%
I
I
7%
I I
~ L . ___ I ___
Source: Appendix Table !!.2
TABLE 3.16- POTENTIAL PRICE SAVINGS FOR FIAT DUCATO
(Ecus per vehicle net of tax, 1987)
Belgium France I Germany I Italy UK
I I
Mean Price 8344
I
10079
I
9199 9608 8686
I I
Potential Supplier -
I
B
I
B B B
I I
Price Difference
- I
17%
I
9% 13% 4%
I I
Threshold
-
I
6%
I
6% 8% 6%
I I
Potential Saving
-
I
12%
I
3% 5% 0
I I
Source: Appendix Table !!.2
- 606 -
TABLE 3.17- POTENTIAL PRICE SAVINGS FOR VW TRANSPORTER
(Ecus per vehicle, 1987)
Belgium France I Germany I Italy
I I
Mean Price 8416
I
10491 9309 10974
I
Potential Supplier
- I
B B B
I
Price Difference -
I
20% 10% 23%
I
Threshold -
I
6% 6% 8%
I
Potential Saving -
I
14% 4% 16%
I
85
UK
8479
B
1%
6%
0
Source: Appendix Table I I. 2
3.6.12 Cardiac monitor
The cardiac monitor is obviously a highly differentiated
and subject to continual new product development. Quotations were
taken for one of two similar models as far as possible. The prices
are in fact very similar between countries, with the exception of
the UK, which is probably a lower specification. With the estimated
saving threshold there are no potential savings (see Table 3.18).
TABLE 3.18- POTENTIAL PRICE SAVINGS FOR CARDIAC MONITOR
(Ecus per machine, 1987)
I
Belgium France I Germany I Italy UK
I
I I I
I
Mean Price 2698 2847
I
2957
I
2926 2490
I
I I I
Potential Supplier UK UK
I
UK
I
UK
- I
I I I
Price Difference 8% 13%
I
16%
I
15% - I
I I I
Threshold 42% 41%
I
40%
I
42% - I
I I I
Potential Saving 0 0
I
0
I
0 - I
I I I
Source: Appendix Table II.2
- 607 -
86
3.6.13 X-ray screening unit
A particular brand was specified and quotations obtained for this,
and also for similar models. Average prices are similar between
countries, except for a higher price in Italy (see Table 3.19)
although prices for the identical product varied as follows:
B
F
FRG
I
UK
Price (Ecus)
138,311
222,307
183,320
226,426
App. Saving
38%
25%
39%
This indicates a discriminatory pricing policy, so that considerable
Sa
.. ; ... ,.s , . . , . . . , , , , . ~ +-he ..... et;,....,l 1y be
Y oll!:f v\JU IU \.oil VI IVU. I mcdc if hospital:; ~ l e r ~ able tc !:lt.iJ
from foreign distributors (in this case, in Belgium). In practice
this is not possible, since health authorities only make occasional
purchases of X-ray units, and although the price is significant,
purchasing from abroad would involve a great deal of time and
expense. Distributors would probably not respond to international
tenders, and they are likely to have exclusive selling rights in
their own country. The purchaser would therefore have to make the
purchase in the low-price country and arrange shipment himself.
This is not a problem of public procurement. There is another
barrier which enables price differences to exist - probably (this is
conjecture) exclusive dealerships.
For calculation of the savings, it has been assumed that there are
no obstacles to purchasing from abroad. The indicated savings of up
to 47 percent are probably, therefore, not achievable.
- 608 -
TABLE 3.19- POTENTIAL PRICE SAVINGS FOR X-RAY MACHINE
(Ecus per machine, 1987)
Belgium France
I Germany I
I I
Italy I
87
UK
Mean Price 138000 162000 1600001 226000 11 04000
I I
Potential Supplier UK UK UK
I
UK
I
I I
Price Difference 25% 36% 35%
I
54%
I
I I
Threshold 8% 7% 8%
I
7%
I
I I
Potentiial Saving 17% 28% 27%
I
47%
I
I I
Source: Appendix Table II.2
3.6. 14 Electrical transformer
Some estimates have been made to calculate equivalent prices for a
hypothetical l,OOOkVa transformer, since standards vary between
countries.
Germany and Italy appear to have low prices, around 25 percent below
the other three. There are competing manufacturers of transformers
who could manufacture to other countries' standards with probably
little extra cost. This is a product where nationalistic purchasing
is known to apply, and its removal would probably lead to savings.
The savings threshold is quite low, mainly comprising, transport
costs, and this indicates savings of up to 18 percent (see Table
3.20). For further Eurostat price data on a similar transformer see
Appendix II.
3.6.15 Goods wagon
The International Union of Railways (UIC) has recently produced
standard specifications for railway wagons. These, however, have
not yet been fully adopted by individual railways, who in any case
would have differing 'add-on' options. Quotations were obtained for
- 609 -
TABLE 3.20 - POTENTIAL PRICE SAVINGS FOR TRANSFORMERS
(Ecus per item, 1987)
Belgium France I Germany I Italy
I I
Mean Price 9154 9442 7628 6874
I
I
Potential Supplier I I I - I
I
Price Difference 25% 27% 10% - I
I
Threshold 14% 13% 12% - I
I
Potential Saving 11% 15% 0 - I
I
88
UK
10317
I
33%
15%
18%
Source: Appendix Table I I. 2
the specification used by Eurostat for price comparisons, which
differs slightly from the UIC standard. In most cases suppliers had
to estimate the price, si nee they had iiot quo
specification.
Prices obtained were within a range of 1.7:1 with actual prices paid
being in a 1.4:1 range. Since transport costs are low, this
indicates some scope for savings. With a 5 percent saving
threshold, potential savings are up to 22 percent based on mean
quoted prices, although some of the prices estimated by supp 1 i ers
may not be reliable (see Table 3.21).
TABLE 3.21 - POTENTIAL PRICE SAVINGS FOR GOODS WAGON
(Ecus per wagon net of tax, 1987)
Belgium France I Germany I Italy UK
I I
Mean Price 63500 52400
I
71500
I
58600 61600
I I
Potential Supplier F
- I
F
I
F F
I I
Price Difference 17% - I 27%
I
11% 15%
I I
Threshold 5%
I
5%
I
6% 5%
I I
Potential Saving 13%
- I 22%
I
5% 10%
I I
- 610 -
89
3.6. 16 Telephones
Telephone handsets have historically had widely differing
specifications between countries, in some cases being over-designed.
Freeing the telephone markets has led to more appropriate standards
with consequent lower prices, and also to a wide range of models.
The market is discussed in detail in Case Study 7. For Eurostat
data on telephone prices see Appendix II.
TABLE 3.22 - POTENTIAL PRICE SAVINGS FOR TELEPHONES
(Ecus per item, 1987)
Belgium France
I Germany I
I I
Italy
Mean Price 40 54 47 21
I
I
Potential Supplier I UK I
- I
I
Price Difference 48% 62% 56% - I
I
Threshold 29% 21% 19%
- I
I
Potential Saving 19% 41% 37%
- I
I
Source: Appendix Table II.2
UK
27
I
23%
53%
0
The quotations obtained show wide variability (4.3:1) which will
largely be accounted for by product differentiation. Ignoring
differentiation, savings of up to 42 percent are indicated (see
Table 3.22 above).
3.6.17 Office electrical equipment
Eurostat data for typewriters, calculators and paper shredders is
given in Appendix II.
- 611 -
90
4. CASE STUDY 1: COAL
4.1 Industry Structure
There is very little intra-European trade in coal, but large imports
from third countries.
Only the UK and Federal Republic of Germany have large coal mining
industries and are practically self sufficient in coal. The French
industry is contracting, and other EC countries import most of their
requirements from non EC countries.
Production of hard coal in EC states in 1986 as fol1Gws:
UK
FRG
Spain
France
Belgium
Total EEC
Million tonnes
hard coal production 1986
105
87
16
14
6
228
Source: Kempense Steenkolenmijnen Annual Report 1986
4.2 Competitiveness
Both UK and Germany have price agreements and subsidies which enable
the power industry to purchase national coal, the production cost of
which exceeds world prices.
- 612 -
91
German coal, on the whole, costs more than British coal. Each of
the mining companies, mainly private, has a 'just price' set by an
offici a 1 body (the BAW) based on a cost formu 1 a (the 'Schwantag
formel : this is itself a powerful barrier to other EC coal
producers who have not attempted the camp 1 ex process of getting
their 'just price' calculated by BAW). The German electricity
companies have an agreement to purchase a minimum quantity of coal
from the German coal mining industry. They receive a subsidy
calculated on the difference between the 'just price' they pay, and
an average of the prices of imported oil and coal. This subsidy on
steam coal (the Kohlepfennig) is charged to customers and is
currently 7.5% of the electricity price: equivalent to around half
of the coal price. The objective is to prevent Germany becoming
totally dependent on foreign energy sources. German coal would also
be of strategic importance to other EC countries in times of crisis
(Germany, along with other non-EC countries, supplied the UK during
the miners' strike 0f 1984).
The 'just price' set for six major coal companies in 1986 ranged
from 250 DM/t to 306 DM/t. The estimated average prices and
Kohlepfennig in 1987 are as follows:
German coal
Kohlepfennig subsidy
Net paid by electricity companies
Imported coal
Imported oil (per tonne coal equivalent)
In the UK, the Central Electricity Generating
DM/t
265
130
135
110
160
Board (CEGB)
Ecu/t
128
63
65
53
77
and South
of Scotland Electricity Board (SSEB) have agreements which expose
British Coal (BC) to competition with world prices at the margin.
CEGB's agreement covering 1986 to 1991 defines three tranches with
an average price around 40 per tonne (56.8 ecus/t):
* 50mt (declining) at pithead prices averaging 46.80/tonne
(66.5 ecus/t)
- 613 -
92
* 12mt at prices reflecting the average of imported oil and coal
(currently 33/tonne - 46.9 ecus/t)
* the rest (10-25mt) at prices reflecting the cost of imported
coal deliveries to a coastal site (29.50/tonne in mid 1987 -
41.9 ecus/t).
British Coal is investing in new efficient pits and closing old
uneconomic ones. The Plan for Coal stipulates that new investment
should be made only where costs will be below 1 per gigajoule,
equivalent to about 25/tonne (36 ecus/t), which is below mid 1987
imported coal costs.
4.3 Effects of Opening Up Public Procurement
Coal may need to be a special case of public procurement because of
the ECSC If opened up to the full of
competition, however, there is likely to be little effect on
intra-EC trade, because transport costs make even the coal from
efficient UK pits uncompetitive with 3rd country imports to
Continental Europe;
country imports.
but there would be some increase in third
Transport costs and port capacity are, however, a natural barrier to
imports. It costs 14.75 per tonne (21 ecus/t), for example, from
Bristol to the Didcot power station, which puts imported coal prices
to inland power stations close to the top tranche price from British
Coal. Coal power station capacity in the UK and Germany is mainly
close to mines and distant from ports.
Germany,
the UK:
with higher cost mines, is probably more vulnerable than
by the Rhine, imported coal can probably undercut most of
the Ruhr production. In the UK, on the other hand, it is estimated
the imports would rise from the present 12mt to between 20mt and
30mt, an increase in import penetration of about 10 percent. This
- 614 -
93
would save around ~ percent of the power industry's coal bill, if
averaged price coal (40) was replaced by imports at 30 - a 25
percent price reduction.
In Belgium,
third of the
(70 ecus/t),
pits are closing and the power industry only takes a
industry's production. Prices are around 3,000 BF/t
at which price it is apparently competitive with
imported coal to power stations. This price, however, includes very
high production subsidies, but no supply agreements or consumer
subsidies. Changes in procurement practice would not therefore have
any effect on trade (although removal of subsidies to mining
companies obviously would).
4.4 Scenario
The above considerations suggest the following scenario.
* Static price effect:
UK 25% saving in coal prices; on 10 percent of
consumption
FRG 50% saving in coal prices (the present subsidy); on
90 percent of the production
Others: no significant change
No change in intra-EC trade.
This assumes no change in the existing direct and indirect subsidies
to coal mining companies. The only effect of internal market
legislation is on the purchaser.
* Restructuring effect:
UK acce 1 erated c 1 osure of 10 percent of British Co a 1
capacity
- 615 -
94
FRG closure of most German pits
Others: accelerated closure of remaining pits.
These restructuring effects would support the same price effects
outlined above, and would accelerate the loss of employment already
taking place.
- 616 -
95
5. CASE STUDY 2: HEAVY FABRICATIONS (BOILERS AND PRESSURE VESSELS)
5.1 Industry Structure
5.1.1 The product
This and the fo 11 owing case study (on turbine generators) examine
two key products supplied to the power generation industry. The
product concerned here is the heavy steel fabrication part of power
station equipment - the steam raising plant which includes
conventional power station boilers (oil or coal) and also pressure
vessels for nuclear power stations. This is one part of the heavy
fabricatior. industry, which can be defined as the manufacture of
equipment from stee 1 p 1 ate, with the capability of we 1 ding stee 1
over Scm thick.
The industry also manufactures offshore oil and gas i nsta 11 ati ons,
steel furnaces, process plant, bridges and similar structures, and
is closely related to shipbuilding. The boiler makers are a
specialised part of the industry, however. In France and Italy they
are part of integrated power station building companies. Repair and
refurbishment (captive markets) are a significant part of the
business.
5.1.2 Markets
The industry has been in crisis for several decades, because its
market changes faster than it can a d a ~ In the 1970s it was
adapting to new technology, particularly the move to large power
station units, and there was new investment in coastal sites and in
capacity for handling larger items. It is at present still in
- 617 -
96
upheaval, to adapt to the reduced power station building programmes
resulting from the 1973 and 1979 oil price rises. The industry was
cushioned from the effect of reduced power station building, by the
new markets for offshore equipment.
Because their home markets fluctuate, all the major companies depend
heavily on exports to fill their order books. Exports are m i n l ~ to
developing countries, and the European, Japanese and American
suppliers traditionally compete fiercely for those orders, with
government support through tied aid and export finance.
In spite of the reorganisation and reinvestment in the past, there
are still too many firms and too many inefficient plants in Europe.
Their scale of operation is lower than competitors in the US and
Japan, and there is massive over-capacity. This is now compounded
by two new factors:
* the Chernobyl aftermath, which cut back the rep 1 acement of
conventional by _nuclear capacity (but is likely to help
conventional
specialists)
boiler . manufacturers vis-a-vis nuclear
* the entry of low cost producers from China, India and South
Korea into the export markets.
It is estimated that world capacity is now 10 times the demand.
Capacity utilisation in Europe averages around 30 percent.
There is no trade between the major EC producers (France, Germany,
Italy and the UK), although all compete for smaller markets, like
the Netherlands and Greece, as well as for non-European markets.
The adjustment problem, however,
Community. The major players
Switzerland.
is European, not just European
include Sweden, Austria and
- 618 -
97
5.1.3 Firms
Within the EC, the principal firms are:
Belgium:
* Cockerill Mechanical Industries (CMI): this is a subsidiary
of the Be 1 gi an stee 1 company Cockeri 11-Sambre. CMI
manufactures power station boilers and nuclear pressure
vessels, as well as equipment for the metallurgical and
mechanical engineering industries, diesel engines, diesel
railway locomotives and armaments (cannons). CMI manufactures
boilers under the C-E licence, but also has a Babcock licence
for boiler repair. They claim a technological lead in
fluidised bed boilers.
There is a second boiler manufacturer, Brouhan, reported to have
about a quarter of the Be 1 gi an market, making it a very sma 11
producer.
France:
* Framatome: which provides turnkey PWR nuclear power stations
and has its own fabricating facilities. It took over the
boilermaking and energy activities of Creusot-Loire when the
latter was broken up in 1985. (Creusot-Loire was previously a
major shareholder in Framatome). The French nuclear programme
is now virtually complete, so Framatome must compete in export
markets and perhaps diversify into non-nuclear markets. It is
a partly public sector company, with CGE (Compagnie Generale
d'Electricite) and CEA (Conmission a l'Energie Atomique) as
main shareholders and a small shareholding by EdF. CGE was
privatised in May 1987, leaving state participation in
Framatome at 45 percent. It has enjoyed virtually sole access
to the French power equipment market, but subcontracts some
fabrications and heavy electrical equipment to Alsthom
(another CGE subsidiary) and Jeumont-Schneider.
- 619 -

* Stein Industrie, part of Alsthom: which is a 'national
champion' par excellence, supplying power generation
equipment, railway equipment and locomotives,
telecommunications and defence equipment.
Germany:
* Deutsche Babcock: which is an independent licensee of Babcock
technology. It manufactures steam raising plant at four group
companies. The group also produces process plant and
compressors, and is in the construction industry.
* Steinmueller: which is a private company and seen as a major
competitor by other European firms.
Brown Boveri provide turnkey power station packages but do not
manufacture the boilers. There are also '.Aiho
are not well known outside Germany:
* EVT in Stuttgart: which is jointly one third owned by
Combustion Engineering, MAN and Krupp. (Krupp's share is
subject to a disputed sale to France's Stein Industrie)
* Lentjes: which is a private company.
Italy:
* Ansaldo (with its subsidiary Termosud): which is an IRI
company, is an integrated power station equipment supp 1 i er,
making nuclear and conventional steam generators, turbine
generators, transformers, and also electric motors. Ansaldo
is currently undergoing a major rationalisation and cost
reduction investment programme.
- 620 -
99
* Franco Tosi: which is privately
integrated power station equipment
efficient than Ansaldo at present,
position.
and is another
probably more
owned,
supplier,
but in a weaker market
* Sulzer:
produce complete equipment packages for smaller
UK:
municipal power stations, and also hydroelectric equipment.
Boilers are manufactured at a plant in Vicenza recently
acquired from the Swiss Wyss-de Pretto.
* Babcock Power: which is predominantly a boiler manufacturer
and one of the three world licensors (along with Foster
Wheeler and Combustion Engineering of USA). Babcock is also
involved in process plant manufacture. The parent, Babcock
Internationai, is currently
takeover bid from outside the
rumoured bids from (among
manufacturer GEC.
(August 1987 J the subject of a
industry, after the collapse of
others) the turbine-generator
* NEI: which is the only UK supplier of complete power station
equipment packages. It is a diversified heavy engineering
group, formed by the merger of various firms in the 1970s.
* GEC Energy Systems: which has a small niche for certain
fabrications for nuclear power stations, based on its AGR
reactor experience.
* Foster Wheeler Power Products: which is the principal
European subsidiary of one of the major US boilermakers, which
is also a diversified process plant manufacturer and
contractor. They have sold no boilers in Europe or the UK
si nee the 1960s but have a 1 arge share of the UK repair and
retrofit market, and of export sales.
- 621 -
100
5.2 Competitiveness
Comparison of prices in the utility boiler business is impossible,
since prices bid for particular contracts are largely unrelated to
total costs. The European manufacturers compete against each other
mainly in overseas markets, rarely in Europe. The prices are
distorted because:
* there is often aid, cheap export finance, or hidden subsidies
* export work is priced below home work: marginal costs are well
below total costs because the industry has endemic over-
capacity. Exports are used to keep order books steady, and
the price bid reflects the urgency of the need to win orders
to keep the work force occupied
* pr-icing strategy depends on an assessment of hcv: strc:-:g the
competition is, and of what the customer is prepared to pay.
There is frequently a 2 ~ range between bids for a specific job, but
no pattern as to who bids high and who bids low. In the home
markets there is no standard of comparison, but the consensus of
opinion seems to be that there is very little difference in prices
in the major markets - although German prices may be slightly higher
than French, Italian and UK prices, and Belgian prices much higher.
In terms of cost, however, the German, French and UK manufacturers
are believed to be most efficient, with Italian manufacturers being
cushioned by subsidies. German producers are probably the most cost
efficient of all, despite higher labour cost, because of higher
capacity utilisation and more modern facilities: this however could
quickly change. All agree, however, that the Japanese and the newer
producers (India, China, South Korea) are a serious threat.
5.3 Economies of Scale
Because all firms are working below capacity, there are significant
short run economies of scale.
- 622 -
l 01
It is generally agreed that doubling output would be assimilated by
all the leading firms within their existing facilities, and would
lead to unit cost reductions of about 20%. Table 5.1 shows the
reported cost structure for five firms.
TABLE 5.1- COST STRUCTURE IN BOILERS/PRESSURE VESSELS FABRICATION
(% of production cost 1987)
Firm:-
A B c D E Average
Labour 30 53 I ) 62 65 52
I ) 73
Materials 35 32 I ) 16 15 24
Overheads 25 ll
I
18 15 15 17
R&D 10 4
I
9 7 5 7
I
100 100
I
l 00 100 l 00 100
I
Source: WS Atkins interviews
This indicates the short run economies of scale shown in Table 5.2,
which confirm the opinions reported above, that doubling output
reduces average costs by 20 percent.
TABLE 5.2 - SHORT RUN ECONOMIES OF SCALE IN BOILERS/PRESSURE VESSELS
(Cost and volume indices; current output = 100)
Output:
Costs:
Labour*
Materials
Overheads
R&D*
Total Cost
Average Cost
Incremental Cost/Unit
Source: WS Atkins
100
52
24
17
7
100
1
110
55.6
26.4
17.0
7.4
106.4
0.97
0.64
NOTE: Labou
0
_gost 0< ( vo 1 um
0

6
O
7
; R&D 0< ( vo 1 ume) O
6
( 1 . 1 ) 0 7 = 1 . 059 20 7 = 1 . 52
( l. 1 ) . = l. 069 2 . = l. 62
200
84.5
48.0
17.0
10.6
160.1
0.80
0.60
- 623 -
102
Table 5.2 also shows that boilers might be sold in the export market
at down to 60% of average cost - hence the 2:1 range of price quotes
reported in overseas tenders.
Long run economies of scale are likely to be insignificant, however.
Reorganisation and restructuring in the 1970s has brought the main
producers' plant up to an efficient scale, and eliminated small
inefficient works. The efficient scale is dictated principally by
the maximum size of units which have to be handled. Production is
always on a single-unit, project basis with no economies of series
production. The direction of technical progress is likely to be
towards more robotisation and computer control of operation, and the
breaking down of manufacturing operations so that some of the
fabrication can be sub-contracted to low cost, third world coastal
sites.
5. 4 Effects of Openi.ng Up Pub 1 i c Procurement
Most firms believe that opening up public procurement is firstly
highly improbable, and secondly unlikely to have any short-term
effect. In the longer term, however, it would aid and accelerate
the restructuring of the industry which is already underway.
There is no doubt that the boilermakers (and associated process
plant and shipbuilding industries) are supported by public
purchasing policies, and by subsidies and aid. Assuming that public
procurement could be completely opened up, and that suppliers
actually respond, the inmediate effect would be pressure to reduce
home market prices. Some firms thought prices might fa 11 by up to
10 percent. Since the overall profit margins are very slim, this can
only happen with the present industry structure if export prices
rise to compensate. With intensifying competition for these
(generally lower technology) products from cheap labour countries
this is very unlikely, so firms will make losses and be forced to
merge or close.
- 624 -
103
This competitive effect may fail to materialise because:
* the cost of bidding for a new contract is very high (more than
1 million Ecus for a complete power station), even in the home
market for known product specifications. If there are more
competitors, the cost of bidding is increased and the
probability of winning is reduced. In a foreign market
against indigenous competition the chances of winning are
viewed as negligible, so firms will not choose to bid.
* if more firms do bid, the cost of selling increases, which
could put costs up by more than the potential price reduction.
Margins in the industry are very low; for example for four
firms in 1986:
Firm A
Firm B
Firm C
Firm D
Net Profit/Turnover
6%
0.2%
8%
2%
Selling costs may be around one percent of turnover: doubling
selling costs could wipe out profit margins for some firms.
* a large part of the boilermakers business is repair and
refurbishment. This part of the business is not normally open
to tender. This has two consequences:
- this part of the business will not be subject to increased
competition, so prices will not be driven down
- the price of repair and refurbishment work might be put up
to compensate for lost profit on new build work.
* suppliers will be afraid of starting a price war which only
the Far Eastern producers can win.
S25 -
104
In the longer term, opening up the internal market will assist the
restructuring that producers are already facing. The ability to
move sub-assemblies and products around Europe, the easing of trans-
Europe mergers and cooperation agreements, mutual recognition of
standards and other aspects of the Internal Market are more
important than changes in public purchasing policy. Two aspects of
public purchasing policy are important, however:
* at present, national governments each support two or more
nat i ana 1 supp 1 i ers. Any attempt at merger, takeover or
closure would bring anti-trust action. If the whole of Europe
is seen as the natura 1 market, firms may be ab 1 e to merge.
Several firms viewed the ideal scenario as having one
integrated power station supplier in each of the major
markets, with orderly marketing agreements.
* the threat of real competiti0n from outside the EC. w ~ s
would be a necessary consequence of open public tendering, is
already causing_firms to make cost reducing investment and
restructuring plans.
Both UK and Italian firms view a complete freeing of public
procurement as a serious threat. Both countries have passed through
a long period of low investment in their home power generation
industries, which has starved them of funds for new product
development (mainly in terms of materials science and electronic
combustion-control systems). They have relied on repair work on
earlier generations of boilers, and on exporting to low technology
markets. Now both Italy and the UK are embarking on a period of new
power station building at the rate of around 15,000MW over the next
decade. Germany, meanwhile, has maintained a steady, though low,
investment in power stations, leaving the German producers in better
shape. In France, at the other extreme, the heavy programme of
nuclear power is now coming to an end, leaving Framatome hungry for
markets. French and German producers should therefore welcome the
opportunity to attack the growing Italian and UK markets.
- 626 -
105
5.5 Scenario
These considerations suggest the following scenario:
* Static Price Effect: negligible.
* Restructuring Effect:
Far East penetration of markets: say 20% of major markets
(for sub-contract assemblies) and 50% of minor markets
- mergers of some firms and closure of some facilities
- doubling of output of the survivors, from existing,
modernised facilities
- price falls 20%
some specialisation between the four
leading to some trade between them
nono+rat.;l"\n)
f'- -.,. I Vt
remaining firms
( say 20% import
- France gains a monopo 1 y in the European Community on PWR
station technology.
This scenario is likely anyway. The Internal Market will facilitate
and accelerate it. Open public procurement policies are one aspect
of the internal market - a necessary but not sufficient condition
for the changes described.
The net result on employment is not clear. European producers lose
share (a quarter, on the above hyptheses), and increased efficiency
increases productivity. The combined effect of these could reduce
employment by half in a static market. EC markets may be stronger
over the next decade or two, but export markets will decline faster.
Employment overall must fall by over half in the next decade or so,
but this cannot be ascribed to open public procurement.
)27 -
106
Without opening up public procurement, European firms wi 11 remain
too small, unprofitable and increasingly uncompetitive. They would
require increasing protection against low cost producers, until
eventually it would be too late to adapt if exposed to competition,
and the industry would be destroyed.
- 628 -
107
6. CASE STUDY 3: TURBINE GENERATORS
6.1 Industry Structure
6.1.1 The product
Turbine generator manufacturers are a subsector of the heavy
electrical engineering industry, with the specialist addition of
turbine technology, involving thermodynamic design and advanced
materials technology.
6.1.2 Markets
The industry faces the same market pressures as the boiler/pressure
vessel manufacturers described in the previous case study. It has
passed through a decade with n9 new orders in Italy and UK, and
limited orders in Germany (but with the large nuclear programme in
France). It is heavily dependant upon exports to the third world,
where all the established producers compete aggressively for orders,
but are now threatened by Japanese supp 1 i ers (not as yet by the
really low wage companies of S and SE Asia). Profit margins are
very 1 ow, and there is overcapacity, a 1 though not as much as in
boilermaking.
6.1.3 Firms
Many of the producers are linked to the boiler manufacturers,
notably in France and Italy. Many of the producers are also parts
of large electrical engineering groups. Some of their other product
areas are buoyant (eg. telecommunications) so these groups are less
threatened than the fabricators, whose other product areas (process
plant, steel plant, offshore structures) are also now in decline.
629 -
108
The major suppliers are:
Belgium:
* ACEC: jointly owned by Societe Generale de Belgique and
France's CGE, producing a wide range of electrical and
electronic goods (including railway locomotives and
telecommunications equipment).
France:
* Alsthom-Jeumont: this is a joint subsidiary of Alsthom and
Jeumont Schneider (Alsthom also has a joint venture with
Framatome - both are CGE subsidiaries - making hydroelectric
turbine generators, called Neyrpic).
A1sthom is the main subsidi=.ry of CGE i!1 the energy
and transportation sectors. It is in shipbuilding,
boilermaking (Stein Industrie), electrical and mechanical
power station and distribution equipment, railway equipment,
subsea tecnology, robotics and industrial plant. CGE, the
parent, was privatised in May 1987.
Jeumont-Schneider is the second French electrical/ mechanical
engineering conglomerate. It is a subsidiary of Parisienne
d'Etudes et de Participations SA. Jeumont-Schneider is
principally involved in energy equipment, transport and
telecommunications.
A 1 sthom ( CGE) and Jeumont-Schnei der between them are major French
suppliers to most of the important public sector procurement areas -
energy, transport, telecommunication and defence.
- 630 -
109
Germany:
* Siemens/Kraftwerk Union AG (KWU): KWU is the main, but
junior, competitor to Framatome in the European nuclear power
equipment industry. Siemens is involved in all aspects of
electrical and electronic engineering from power stations to
microelectronic components.
* BBC AG: German twin to the Swiss Brown Boveri et Cie. BBC is
mainly in heavy electrical goods, including railway equipment.
In August 1987 Brown Boveri announced merger plans with ASEA
of Sweden to form the world's largest heavy electrical
engineering firm.
* MAN: subsidiary of the heavy engineering firm and contractor
GHH.
* AEG: specialising in turbine generators for the smaller
German power utilities and for industry.
Italy:
* Ansaldo: like Franco Tosi below, a turnkey power station
supplier, described in the boiler case study. Ansaldo is a
public sector company.
* Franco Tosi: a power p 1 ant speci a 1 i st, and probably (a 1 ong
with Belgium's ACEC) one the most vulnerable suppliers for
that reason.
Sulzer also manufacture hydroelectric turbine generators in
Italy.
631 -
110
UK:
* GEC Turbine Generators: part of the 1 a rge GE C e 1 ect ric a 1
group. This company has had no new UK orders for 10 years and
works entirely outside Europe.
* NEI Parsons: the generator company in the NEI group, which is
mainly in process plant and fabrications. NEI offer a
complete power station package; GEC only the electrical parts.
NEI has also had no new domestic orders since the 1970's and
has less export work than GEC, but survives on refurbishment
and repairs, and related fabrication and pipework.
Turnover of these companies in turbine generators is not possible to
extract from consolidated company accounts, but the ranking of firms
in terms of export orders is shown in Tab 1 e 6. 1 . Exports of many
:najor firms 3re around 50 percent of turnover. Note that therE: c.1re
three Japanese firms in the top five.
Table 6.2 shows the ranking of firms by total heavy electrical
engineering turnover, assuming the merger of ASEA and BBC goes
ahead.
6.2 Competitiveness
None of the firms interviewed thought there was any very significant
cost or price difference between European firms, except for higher
prices and costs in Belgium. Based on a Delphi analysis (the
average of informed guesses} relative prices appear to be something
1 ike:
Belgium 120
France 105
Germany 100
Italy 11 0
UK 100
- 632 -
TABLE 6.1- RANKING OF FIRMS BY EXPORT ORDERS 1981-1986
FOR POWER GENERATION PLANT
Company Country Total Exports Share of
1981-87 (MW) Exports
1. Mitsubishi Japan 15300 15.0
2. GEC UK 10800 10.6
3. - USSR 10800 10.6
4. Toshiba Japan 8900 8.7
5. Hitachi Japan 8100 7.9
6. Genera 1 Electric USA 7400 7.2
7. KWU/Siemens
I
FRG 6900 6.7
I
8. -
I
Comecon 5600 5.5
I
(exc. USSR)
I
I
9. BBC
I
FRG/Switz 4900 4.8
I
10. Westinghouse
I
USA 4900 4.8
I
11. MAN
I
FRG 4000 4.8
I
12. Ansaldo
I
Italy 3300 3.2
I
13. Alsthom
I
France 3100 3.0
I
14. NEI
I
UK 2500 2. 1
I
15. Franco Tosi
I
Italy 2100 3.6
I
16. Others
I
- 3700 3.6
I
102300 100
Source: GEC Turbine Generators Ltd.
EC producers in bold type
111
633 -
112
TABLE 6.2 - RANKING OF HEAVY ELECTRICAL ENGINEERING FIRMS
Company
ASEA/BBC
Siemens
Hitachi
General Electric
Westinghouse
CGE/Alsthom
Mitsubishi
Toshiba
AEG
GEC
(sales in billion Ecus)
Country Sales in
I
heavy elec.l
engg 1986
I
I
Sweden/Switz/ 14
FRG
FRG 9
Japan 9
USA 9
USA 8
France 7
Japar. 5
Japan 5
FRG 3
UK 3
Total !Employees
Group
I
Sales
I
I
14 160,000
23 363,000
30 164,000
30 304,000
10 125,500
12 150,000
, ?
....
7 1 ()('1('1
I I' \JVV
20 120,000
5 78,000
7 165,000
Source: ASEA, cited in Financial Times Aug 11, 1987
The same comments apply as to boilers, however. Firms only compete
in third markets, where prices are distorted by marginal costing and
cheap export financing. Bid prices often have a 2: 1 range. Home
market prices are higher than export prices (where a home market
exists), but since there are no identical contracts, comparisons
cannot directly be made.
It is generally believed, however, that the Belgian and Italian
producers have received subsidies, and their manufacturing costs are
higher than relative prices would suggest. The German producers
believe their profit margins are slimmer, because their home market
is more competitive while their costs are higher than France and UK,
which have been able to close down inefficient capacity.
- 634 -
113
The industry in general appears to be facing up to the threat of
competition, and preparing for the expected upturn in new orders for
power plant in the 1990's, by investing in cost reducing equipment,
particularly computer integrated manufacturing and robotics.
6.3 Economies of Scale
The Italian and UK industries have rationalised production so that
two producers of similar sizes remain, and in France only one, but
Germany st i 11 has four turbine generator producers (even though
Siemens is one of the world's largest heavy electrical companies).
One of the German companies thought that this gave UK and French
producers a cost advantage because of economies of scale, and
because they had closed down old plant. There is no evidence
however,
sea 1 e.
that German producers are uncompetitive because of small
They in fact appear to have higher levels of capacity
utilisation which will compensate for smaller scale plants.
It is also true, as in boilers, that Europe has more producers than
the USA (a 1 though the number of separate p 1 ants in not known).
There are 11 major producers in the five study countries, plus a few
smaller firms including Holec in Holland, and also competition from
Sweden, Switzerland and Austria. In the USA there are only 2
producers: Westinghouse and General Electric - but each are smaller
in total heavy electrical production than Siemens.
It is worth noting that despite the supposed economies of scale of
the US industry, the USA is not very competitive in export markets.
As Appendix III notes, however, there are possible reasons for this
other than production efficiency. The re 1 at i ve shares of export
markets from Table 6.1 are:
Major European Firms 37%
Japanese Firms 32%
Comecon 16%
USA 12%
Others 3%
100%
635 -
114
There are undoubtedly short run economies of scale as production
fills capacity and average costs fall.
Most firms thought that doubling output from 50 percent capacity
utilisation to full capacity utilisationwould reduce unit costs by
5 to 15 percent. But in this sector most firms are working at 60 to
75 percent capacity at present, so economies are 1 i mi ted and firms
saw no great long term savings from increased scale of operation.
Table 6.3 shows the cost structure reported by six firms. Materials
are a large proportion of costs - 50 to 60 percent for half of the
firms, but 30 to 35 percent for three firms which are more highly
integrated. R&D averages 10 percent.
TABLE 6.3 COST BREAKDOWN IN TURBINE GENERATOR MANUFACTURE
(percent of mi'lnuf<lcturing costs)
Firms
A B c D E F Average
Labour 20 20 35 50 14 20 26
Materials 50 30 35 35 60 55 44
Overheads 25 40 13 10 14 20 20
R&D 5 10 17 5 12 5 10
100 100 100 100 100 100 100
Source: WS Atkins' Interviews
This suggests short run economies of scale for turbine generators as
shown in Table 6.4.
- 636 -
115
TABLE 6.4 - SHORT RUN ECONOMIES OF SCALE IN TURBINE GENERATOR MANUFACTURE
(present output = 100)
Output: l 00 110 150
Labour 26 27.8 34.5
Materials 44 48.4 66.0
Overheads 20 20.0 20.0
R&D 10 10.6 12.8
Total Cost l 00 l 06.8 133.3
Average Cost 0.97 0.89
Incremental Cost 0.68 0.67
Source:
Note:
WS Atkins
Labour = (present labour) x (volume)
0

7
R&D = (present R&D) x (volume)
0

6
l. l
0
.
6
= l. 059
1.50.6
= l. 273
l . l
0
.
7
= l . 06 9 l . 5.
7
= l . 328
Restructuring to enable firms to operate near to full capacity
(assuming present capacity utilisation is around 65 percent) would
reduce costs by 10 percent.
In the long run, however, there are not very significant economies
of scale beyond the minimum efficient scale set by the size of
single orders. Like boiler making, it is essentially a jobbing
industry. Increasing the capacity of plants gives some economy in
indirect manpower, and savings in ancillary facilities such as
materials handling equipment and increased size of firm may give
some economy in research and development. This is debatable: R&D
includes design work and also has as much to do with troubleshooting
and training as with new technology in a mature industry. The main
637 -
116
technological advances relevant in the turbine generator industry
come from the field of materials science and are generated outside
the industry.
Technological progress is likely to move in the direction of
improved materials (reducing the repair and maintenance market
and/or reducing manufacturing time), robotisation and computer aided
design and computer integrated manuf act uri ng (making it easier to
switch between products on the shop floor, minimising the need to
have large plants to reduce the down time on machines). These types
of technological progress tend to minimise economies of scale.
6.4 Effects of Opening Up Public Procurement
The market in the major producing countries is clearly closed to
foreign competition. Only Belgium, of the five countries studied,
actually invites foreign bidders. and suppliers believe
1
rightly or
wrongly, that they do so only to compare ACEC's prices. Suppliers
do not believe, however, that merely being invited to tender would
really change things.-
The obstacles to intra-EC trade are seen to be:
* national preference: suppliers believe that even if markets
are opened up, other EC customers would prefer to buy US
equipment because of bilateral links with USA. It is
interesting to note that the Swiss (Brown Boveri) and Swedish
(ASEA) are probably seen to be neutra 1: Brown Boveri has
associates in EC countries, particularly Germany and France,
so the new BBC-ASEA supergroup will be very we 11 p 1 aced to
take advantage of more open markets.
* the 1 egacy of standards: customers perceive other EC
suppliers as being locked in to their own national standards,
whereas US, Japanese and suppliers from the smaller nations
(including BBC and ASEA again) are more used to working to
foreign standards. Suppliers say this is untrue, and
- 638 -
117
differences in standards present no design or manufacturing
difficulties: it is partly excuse, partly prejudice on the
customers side.
* customers perception of after sales service capabilities:
again seen as false prejudice.
In these circumstances suppliers say they would not waste money
bidding. The smaller suppliers are likely to be more aggressive
than the majors in this respect.
As in the boiler sector, UK and Italian firms particularly fear that
their growing home market, r0upled with their own lack of
demonstrable new-build experience in Europe over the last decade,
will make them vulnerable to attack by the French, German and non-EC
producers over the next decade.
During the interview programme, suppliers did not foresee, and had
apparently not considered, many mergers in the European industry.
The only restructuring suggested was between boilermakers and
turbine generator manufacturers - GEC and Babcock is the only
obvious candidate. The subsequent news of the BBC-ASEA merger may
make the industry think again.
The smaller EC manufacturers would find it hard to survive in a
truly competitive market and one or two would quickly drop out.
Suppliers believe there would be no immediate price effect, because
the industry is already highly competitive.
6.5 Scenario
The following scenario is suggested:
* Static Price Effect: zero.
639 -
118
* Restructuring Effect: capacity wi 11 be fi 11 ed by the
resurgence of power station building, which will enable prices
to fa 11 by 10 percent - but not directly because of the
internal market. The internal market, however, will permit
this increase in capacity utilisation across all firms,
without wasteful capacity expansion in the growing markets of
UK and Italy. This will bring French, German and non-EC firms
into the UK and Italian markets and stimulate rationalisation
by trans-national mergers (more likely between EC and non-EC
companies than between EC companies). This will enable
marginal savings to be made in R&D, design and marketing
costs, say 1 or 2 percent of costs.
There would be no serious employment effect unless jobs shift
out of the EC to low wage countries, but new manufacturing
technology will make this less likely, as direct labour costs
are reduced.
- 640 -
119
7. CASE STUDY 4: ELECTRIC LOCOMOTIVES
7.1 Industry Structure
7. 1.1 The product
The railway transport industry is a major sector of public
purchasing, and procures capital equipment which falls into 4 areas:
* track and civil engineering
* power supplies
* signalling and controls
* rolling stock, including locomotives, m!Jltiple units and
trucks and carriages.
It is in rolling stock that increased trade is most likely and
economies of scale are most likely to be important. This case study
focusses on electric locomotives, which is one product of an
industry - ,.guided land transport equipment,. - which supplies four
main markets:
* locomotives (for freight and mainline passenger trains)
* diesel/electric multiple units and heavy metros
* light rail vehicles
* .. people movers,. for short distances e.g. at airports.
>41 -
120
In the past couple of decades multiple units and metros for
urban/ suburban systems have dominated the market. There is now
growing investment at the other two extremes - advanced locomotives
for high speed trains, and light rail vehicles.
In the supply of locomotives, there are few! integrated firms. In
any contract there are likely to be two main suppliers, for the
mechanical parts and electrical parts respectively. Either may be
the main contractor although as the power unit and controls become
more sophisticated there seems to be a tendancy for the electrical
equipment supp 1 i er to take the 1 ead. There may a 1 so be other
subcontractors for subassemblies, such as bogies, braking systems,
pantographs and electronic controls.
7. 1.2 The market
number of locomotive orders in any year is very A
in fnternational Railway Journal reports intentions throughout the
12 EC States to buy 84 locomotives in 1987. The size of the
locomotive fleet is generally decreasing as the life and downtime of
locomotives is improved. New orders are mainly for replacement of
existing stock by new high technology systems, particularly high
speed passenger trains such as the TGV in France, the ETR450 in
Italy, and the class 91 locomotive in UK.
Product development and technical innovation are of
importance. Critical areas are microprocessor control,
mechanical design for high speed vehicles.
paramount
and the
The key characteristic of the railway industry is that the EC
countries are locked into a heritage of distinct standards,
operating systems and engineering traditions. On electrified lines
there are three energy systems 165Hz (Germany, Austria,
Switzerland and Scandinavia), 50 or 60Hz (most other EC countries'
main lines) and DC (UK southern region). Within each of these there
are voltage differences. At present, only Belgium has multi-voltage
locomotives capable of travelling on neighbouring systems.
- 642 -
121
With the development of high speed trains, and new light rail
systems, standards have recently diverged further.
7.1. 3 Firms
The major producers in the five study countries are listed below:
Belgium
* ACEC (electrical parts) is 50 percent owned and managed by
CGE/ A 1 sthom of France. ACEC is reported to be a high cost
producer, but is the sole supplier to Belgian railways and has
small markets in the ex-Belgian colonies in Africa. It also
makes generators and electrical equipment.
* BN (mechanical parts) cooperates with ACEC in the manufacture
of mainline-electric 1c:cmctives, and is itself a world leader
in light rail vehicles, metros and trams. It also makes
coaches, truck bodies and special transport equipment.
France
* Alsthom, a subsidiary of CGE, took over the railway equipment
interests of Jeumont-Schneider in January 1987 and is now the
sole supplier to French railways. It also recently took over
half of ACEC in Belgium, joined forced with German's MAN for
diesel locos, is a key member of the "50c/s Group" (see
below), and now claims to be the worlds' largest manufacture
of locos and railway equipment.
Germany
The Association of the German Locomotive Industry has 12 members, of
which there are 3 major manufacturers of the electrical motive
parts, and 3 major mechanical part manufacturers. The electrical
>43 -
122
firms (AEG, Siemens and BBC) have joined together with Alsthom/ACEC
to form the 50 c/s group and apparently each take an agreed share of
the Group's export contracts. The major firms are:
* Krauss Maffei (mechanical parts), which also makes industrial
machinery, electronic equipment, defence equipment and special
vehicles.
* Krupp Mak (mechanical parts), part of the steel and heavy
engineering group, is a licensee of General Electric (USA).
* Thyssen Henschel (mechanical parts), also part of a steel and
heavy engineering group, is a licensee of General Motors.
* AEG (electrical part).
+ s.:eme""- (e
1
ec ..... . . d - l r.a-+- \
I 11.:0 I "' I" I I"' I I. I
* BBC AG (electrical part).
None of these German firms have railway equipment as their main line
business, and they seem to each have about one third share of their
respective part of the German market.
Italy
Italy has a large number of
railway rolling stock,
subcontractors or licensees
companies (reportedly over 40) making
most of which are subsidiaries,
of the major mechanical contractors:
* Fiat Ferroviaria (complete locomotives) appears to be the
leader, and is manufacturing the Italian tilt-body trains (ETR
450). Fiat also is the main designer of mechanical parts.
* Breda (complete locomotives) a diversified group in iron and
steel, diesel engines, turbines, h&v equipment and defence
equipment as well as railways.
- 644 -
123
* Ansaldo Transporti (electrical parts) an IRI company. Its
sister company Ansaldo Componenti make power station
equipment.
Among the large number of other contractors in the rail vehicle
sector, there are a number of other important manufacturers of
electrical parts, including Magneto Marelli and Brown Boveri
UK
* GEC Transportation/GEe Traction (electrical parts) GEC
Traction makes locomotives and was formed from a merger of
traction interests of GEC, AEl, and English Electric in 1972.
GEC frequently works with BREL (see below), for the mechanical
parts.
* HKEL thP engineering group of British Rail, mainly involved in
non-powered rolling stock, and in repairs of locomotives. It
is likely to be privatised soon and GEC Transportation would
be a potential purchaser.
* Brush Electrical Machines, part of the Hawker Siddeley Group
(along with Westinghouse Brake and Signal). Brush is an
integrated manufacturer of locomotives.
* Metro CanJDell is a major manufacturer of multiple units and
metro trains, but has also recently been invited to bid for
diesel locomotives.
For such a small market, the number of electric locomotive
manufacturers in Europe is remarkable. In addition to the new
build, there is a large volume of repair and rebuild work and this
is what enables so many manufacturers with different designs to
survive. There is an export market for diesel locomotives, and for
metros and multiple units, but there is little export market for
electric locomotives, since no other continent has such an extensive
electrified mainline network.
645 -
124
In the USA, as Appendix III shows, there are only two locomotive
manufacturers, General Electric and General Motors, making mainly
diesel electric locomotives. The dominance of diesel in US
railroads has enabled these two producers to gain economies of scale
and eliminate smaller competitors.
7.2 Competitiveness
In common with the preceding case studies there is no ready
com pari son of prices or costs between European manufacturers si nee
they never compete in each others markets, and to an even greater
extent than power generation equipment, the products are built to
quite different designs and technical standards. There were quite
divergent views among manufacturers about relative prices. Most
thought that there is very little difference in prices. The
consensus of these interviewees would be the following pattern:
Italy
Belgium
FRG
UK
France
The UK producers,
between countries,
double UK prices.
technical standards
Price Index
120
110
110
105
100
however, saw a much greater price difference
and one respondent claimed Italian prices were
This could be explained perhaps by different
due to geography and track conditions.
Japan and recently South Korea are strong competitors in export
markets. The USA dominates the market for diesel locomotives. For
these, power supply differences are irrelevant, and the US market is
much larger than the European market.
- 646 -
125
In 1955 the US ordered 500 locomotives compared with reported
purchase intentions in 1987 of less than 100 in Europe. This
enables the US manufacturers to produce in long series, and achieve
significant economies of scale.
7.3 Economies of Scale
Locomotive manufacture in Europe is still very much a jobbing
industry because of the importance of maintenance and rebuild
activities, with occasional short series production. Maintenance
and rebuild (a purely jobbing activity) is carried out by the same
facilities as new build. This is because of the large number of
different systems and locomotive designs, and the consequent large
number of producers.
In these circumstances there are short run economies of sea 1 e as
lor.g as there is excess capacity. At present Lht: industry is
generally operating at around 50 percent of capacity, although some
manufacturers claimed over 80 percent capacity utilisation. A
reduction in the null)ber of manufacturers by about one third wou 1 d
probably therefore allow survivors to increase production by 50
percent. It is difficult to generalise about cost structures, since
the amount of subcontracting and bought-in subassemblies varies.
Table 7.1, however, shows the cost breakdown of a number of firms.
Table 7.2 then shows that average costs would fall by about 13% if
firms operated at full capacity.
In the medium term there are no significant economies of scale to be
achieved by expansion of capacity within the present market
environment. In the very long term, if there could be harmonisation
of the rail system throughout Europe, and reduction of the number of
1 ocomot i ve mode 1 s from the present number (probably around 50 or
more) to a handful, then there would be possibilities of series
production. This is not possible in the foreseeable future.
647 -
126
TABLE 7.1 - COST STRUCTURE OF SOME LOCOMOTIVE MANUFACTURERS
(% of Production Costs)
Firm
A B c D E F !Average
I
Labour 20 35
I
32 8 25 16
I
23
I I
Materials 40 45
I
50 40 46 44
I
44
I I
Overheads 30 20
I
10 50 25 38
I
29
I I
R&D 10 - I 8 2 4 2
I
4
I I
Total Cost 100 100 100 100 100 100
I
100
I
Source: WS Atkins interviews
TABLE 7.2- SHORT RUN ECCNOMIES OF SCALE IN LOCOMOTIVE
(present cost and output = 100)
Output Index
100 110 150
Labour 23 24.6 30.5
Materials 44 48.4 66
Overheads 29 29 29
R&D 4 4.2 5. 1
Total Cost 100 106.2 130.6
Average Cost 0.97 0.87
Incremental Cost 0.66 0.61
Source: WS Atkins
Note: Labour cost c<(volume)
0.7
, R&D 0< ( vo 1 ume)
0.6
- 648 -
127
There would nevertheless be significant savings in development costs
if rationalised product ranges could be developed within the
constraints of the present railway systems. This would allow a
further reduction in the number of manufacturing locations and
rationalisation of production between them. This could bring unit
costs down by about 20 percent compared with present costs.
7.4 Effects of Opening Up Public Procurement
There are signs that some European railways are becoming more open
about procurement. British Rail has a policy of competitive
procurement and recently invited both GM and GE, and a consortium of
NEI, Krupp and BBC, to bid against GEC, Brush and Metro-Cammell for
supply of diesel locomotives. There are, already, privately owned
GM locomotives running on British Rail.
This 0penir1g up of the market results largeiy from technological
factors. There are a number of innovations in locomotive design,
which make potential gains from international procurement evident
now.
The extension of high speed networks, coinciding with the
construction of the Channel Tunnel, is leading to construction of
new track for the first time in decades, giving an export
opportunity to the French manufacturers of TGVs, which have a
significant technical lead over other manufacturers. The Eurotunnel
system is a private sector Anglo-French venture. It will buy
shuttle locomotives, and SNCF/BR will buy locomotives for through
trains from London to Paris.
There are also important advantages in the control systems for
locomotives by the application of microprocessor control. GEC
claims to have a significant lead in this area. Belgium and Italian
manufacturers claim a lead in multi-voltage locomotives.
649 -
128
These technology changes are forcing international procurement, and
are leading to pan-European grouping of manufacturers - for example
the 50 Hertz Group, the purchase of Jeumont-Schneiders facilities
by Alsthom and reported contacts between Alsthom and other European
manufacturers.
Public procurement is therefore responding to technology changes.
Conversely, opening up public procurement per se will have little
effect on the competitive environment. The main barrier to
competitive bidding is that development programmes for new models
have in the past been done jointly by the customer and the supplier.
There is subsequently little chance of another supplier being able
to win orders for existing designs, and none would bother to try.
Effective joint development requires geographical proximity and a
conmon language and industrial culture. It is possible, however,
that for the next generation of locomotives, development will be at
arii1
1
S length.
The bonds between railway and supplier are loosening. Railways in
Europe historically designed and built their own rolling stock.
When steam was replaced in the 1960s, railways lost some of their
manufacturing but held on to design. New technology is now coming
from the manufacturers: British Rai 1 s unsuccessful attempts to
design high speed trains ended its design dominance in UK and BREL
is being privatised. In future, railways will be able to set
performance specifications and let manufacturers bid for the design
and construction package.
If there are cant i nued mergers, takeovers and consortia between
European firms in order to obtain technology transfer, there is
likely to be increased trade in subassemblies or whole locomotives
in future,
technical
even if national railways continue to have close
relationships with their domestic manufacturers.
Differences in technical standards are not a barrier to trade per
se: manufacturers can easily manufacture to the standards of any
other railway.
- 650 -
129
7.5 Scenario
* Static Price Effect: negligible in the short term. There will
be no short term change in intra-EC trade but there could be
increased imports of diesel locos (not electric) from US,
Japan and S Korea.
Increased competion will take effect with many years delay,
on the next generation of locomotives. This may reduce prices
as follows:
-20 to 30% - Belgium, FRG and Italy
zero - France and UK.
*Restructuring Effect: collaboration and mergers, with
rationalistion of product lines. In a static market this
would lead to closure- of around of but tht:!
market may grow to fill capacity. Cost savings due to ST
economies of scale would be around 13%.
In the very long term, European railway systems must be
harmonized. This would give scope for economies of series
production and savings in development costs.
There will be new trade in subcomponents and assembled locomotives,
reaching levels of import penetration in the major countries of
perhaps 50 percent in 20 to 30 years. An 'ideal' industry would
have say 4 major companies each producing a rationalised range of
subassemblies or models. Import penetration in these four producing
countries would then be 75 percent, and in all other EC countries
100 percent.
This scenario results from technology changes and from the external
market environment, to which public procurement responds. It is not
a result of public procurement legislation.
651 -
130
8. CASE STUDY 5: MAINFRAME COMPUTERS
8.1 Industry Structure
8.1.1 The product
Mainframe computer systems are high-performance systems used for
large-volume, general purpose applications. The price of mainframe
systems, including peripherals, range typically from 0.3 million
ecus to 6 million ecus. At the low end of the sector, uniprocessor
models operate in the range of 9-12 millions of instructions per
second (MIPS). High-end quadratic models can surpass 50 MIPS. The
industry is developing rapidly, and t!'le price/performance ratio
should continue to fall, while the processing rate is expected to
approach 100 MIPS by the early 199os. A sub-category of the sector
is comprised of supercomputers, whose performance far exceeds that
of commercial mainframes. The average price of supercomputers is 12
million ecus, and only 150 were in use world-wide in 1985. There
are no European manufacturers of such systems.
8.1.2 The market
It is the microcomputer and minicomputer markets which have shown
spectacular growth in the past decade, but the market for large
mainframe computers still continues to grow at some 10 to 20 percent
per year.
- 652 -
131
8.1.3 The firms
The major supp 1 i ers of computer equipment to Europe are 1 i sted in
Table 8.1. With the exception of Olivetti, all are suppliers of
mainframes. The other major mainframe suppliers are NCR and
Hewlett-Packard. Market shares in the mainframe sector for the four
indigenous manufacturers and IBM are set out in Table 8.2.
TABLE 8.1- COMPUTER EQUIPMENT SUPPLIERS TO EUROPE:
MARKET SHARES AND PRODUCTION 1986
Supplier
IBM
Siemens
DEC
Olivetti
Bull
Unisys
Nixdorf
ICL
Total
Position
1
2
3
4
5
6
7
10
Source: Financial Times.
Sales
($billion)
15.7
3.9
2.8
2.7
2.4
2.3
1.9
1.4
44.5
Share
(%)
35.3
8.8
6.3
6. l
5.4
4.3
4.3
3. 1
TABLE 8.2 - MANUFACTURERS' SHARES OF THE EUROPEAN MAINFRAME MARKET
Supplier/Market IBM Siemens Bull ICL Nixdorf
Belgium 60 8 9 2 3
France 50 0 30 2 3
Germany 50 20 3 1 13
Italy 60 3 14 0 2
UK 50 0 1 30 5
All EC 60 7 11 9 5
Source: Roland Berger and Partner/WS Atkins
653 -
The five indigenous EC manufacturers are thus:
* Groupe Bull (Plants in France, USA, Italy and UK): which is
product of a recent merger of interests between Bu 11 of
France; Honeywe 11 of the USA and NEC of Japan. The ori gina 1
Bull (100% French owned) assembled equipment using NEC
tee hno 1 ogy. In 1986, it merged with Honeywell to . form
Honeywell-Bull, and then bought up Honeywell to take full
control. Bull now holds a controlling 42.5% share in
Honeywell-Bull (rising to 65.1% by 1989) with Honeywell
( 42. 5%) and NEC ( 15%) as partners. Production
responsibilities are divided between the three companies as
follows: Honeywell (industrial automation, high-speed
microelectronics), Bull (computer networks), NEC (large
computers). Markets have also been allocated, with Honeywell
responsible for the UK and Italy, and Bull focusing on France
and the rest of Europe. Production is carried Jt
six Bull facilities in France, and one in Torino
( Honeywe 11-Bu 11 ta 1 i a) , one in Scot 1 and ( Honeywe 11 Bull UK)
and two Honeywell plants in USA.
* Siemens (Germany): which sells a full range of mainframes
using both Japanese and indigenous technology. Siemens
formerly sold IBM plug-compatible computers manufactured by
Fujitsu and also manufactures its own small mainframe.
Production is carried out at two facilities in Munich and
Augsburg.
In January 1987, Siemens and the data processing divi sian of BASF
set up Comparex (which is 50%/50% owned by Siemens and BASF) to
market Hitachi computers.
* Nixdorf (Germany): which has two low-end mainframe models.
Nixdorfs strength lies in offering novel and cost-effective
solutions to commercial data processing problems (in the
banking sector, particularly). Its technology is indigenous.
Manufacturing is carried out at Paderborn, Berlin and Cologne.
- 654 -
133
* ICL (UK): which is part of the STC group of companies. ICL
manufacturers a wide range of computer equipment, and is
particularly strong in the UK public sector, notably local
government, police and health authorities. Its strengths lie
in the prov1s1on of system solutions rather than the
manufacture of hardware (the technolgoy for which is bought
from Fujitsu). The UK government has repeatedly provided
emergency financial assistance to ICL, and blocked foreign
purchase on sever a 1 occasions. ICL has two manufacturing
facilities in UK, but is planning to set up facilities in
other EC countries.
* IBM (USA, 6 EC countries and world-wide): is the major
supplier of mainframes to Europe and operates as an indigenous
manufacturer in six EC countries (including France, UK, Italy
and Germany). Large mainframes are assembled in Montpellier
(France) and the sma11er models at Santa Palomba (Ttalyi.
Deliveries from these plants account for 90% of all IBM's
mainframe sales to Europe.
8.2 Competitiveness
Comparison of prices in the mainframe computer industry provides
little indication of the competitiveness of suppliers. There are
three main reasons:
* indigenous manufacturers fix prices in relation to the market
leader, IBM. ICL, for example, generally tries to be 7 to 8%
cheaper than IBM
* each manufacturer uses discriminatory pr1c1 ng, although IBM
tries to ensure that inter-country price differences are not
large enough to encourage re-exports
* manufacturers do not always offer comparable products or
solutions to satisfy customer requirements. In these
circumstances, bid prices can be misleading.
- 655 -
134
However, the balance of opinion suggests that the indigenous
manufacturers lag behind IBM in three important respects:
* production costs: Through heavy investment in manufacturing
technology and distribution, IBM has trimmed costs below the
industry average. This is reflected in relative profit
levels: IBM (14%) against 7 to 9% for ICL, Siemens and
Nixdorf.
* research and development: IBM has access to an enormous R&D
base, while ICL, Siemens and Bull are all dependent on
Japanese techno 1 ogy to varyi n.g degrees. The indigenous R&D
base is considered too small to sustain a competitive level of
product development. This has clearly been recognised as a
problem of both manufacturers and governments, and a number of
initiatives have been taken to close the gap, for example:
the 'Esprit' programme, which commenced in 1982 and
involves 12 companies in 5 countries, and is aimed at
encouraging collaboration in R&D
- the Eureka project, i nvo 1 vi ng European firms, which
provides financial assistance for 62 IT projects
individual country programmes such as the Alvey Flagship
Project in the UK
ICL's joint venture with Bull and Siemens to undertake
pre-competitive research at the European Computer Industry
Centre in Germany
* manufacturing facilities: Export sales to public sector
customers are clearly prejudiced by the lack of manufacturing
facilities inside the ordering country. Thus, ICL, Siemens,
Nixdorf and Bull (until it gained control of Honeywell s
facilities in Italy and the UK) are at a disadvantage compared
to IBM which manufactures in six countries. In its efforts to
increase sales to continental Europe, ICL is currently
considering whether to set up manufacturing plants in Germany,
France or Spain.
- 656 -
135
8.3 Economies of Scale
Because all firms are operating at or near full capacity, there are
no significant short-run economies of scale (e.g. in closure of
inefficient factories}. Investment in new factories or factory
expansions would be necessary to cope with a significant rise in
demand.
Each manufacturer found it difficult to provide a sensible breakdown
of costs for mainframes, primarily because costing systems are not
set up by product. Most agree, however, that a daub 1 i ng of
production could reduce unit costs by 10 to 15%, but this degree of
restructuring is unlikely. The savings would emerge principally in
R&D and marketing, rather than production. Mainframe manufacturing
does not require a large degree of capital investment in
manufacturing plant.
It is worth noting that there are advantages in having a large
market share and being market leader, but these are only partly the
result of absolute differences in scale.
8.4 Effects of Opening Up Public Procurement
Although national purchasing is not as pronounced in mainframes as
in, say, turbine generators, and the market has opened significantly
in recent years, preference is given to indigenous manufacturers by
public sector clients. It is generally agreed that France is the
worst offender. This leads to the sales pattern set out in Table
8.3. Indigneous manufacturers lead their public sector markets,
while IBM dominates the private sector market.
If the market were opened up, there is un 1 ike ly to be downward
pressure in prices. For one thing, the public sector comprises only
30% of the total market, so producers have to be price-competitive
to survive in the market. If, however, the performance of EC
manufacturers in the private sector is a guide to their true
. 657 -
Belgium
France
Germany
Italy
UK
I
I
I
I
I
TABLE 8.3 - MANUFACTURERS' SHARES OF THE EUROPEAN
PUBLIC SECTOR MAINFRAME MARKET, 1987
% of Public
I
% of Total
Sector Market
I
Market
I
Indigenous
I
IBM Other
I
Indigenous
I
IBM
IManufacturer(s)l Imports IManufacturer(s) I
I I I I
60 40 60
65 15 20 30 50
50* 28 22 33* 50
50 50 60
60 20 20 20 50
136
Other
Imports
40
20
17
40
20
Source: WS Atkins interviews
Note: * combining Nixdorf and Siemens
competitivenes, then dn G>pening of the market should iead to a
decline in the indigenous manufacturers market shares. On the
other hand, indigen-ous manufacturers hi storica 1 dominance of the
public sector market should have given them an edge in the provision
of solutions to public sector problems, and a degree of resistance
to change among purchasers. Thus, in the long term, the
redistribution of market shares between companies will not be
significant enough to generate price savings through scale
economies. Nonetheless, the relative high degree of dependence of
indigenous manufacturers on the public sector market poses more
problems than opportunities.
The US view is that the European computer industry is not really
viable, being dependent on the acquisition of off-the-shelf
Japanese technology, preferential access to public sector markets,
and in some cases, state financial support. To become truly
competitive, there must be rationalisation of product lines, and the
development of a strong technological base. Both requirements would
best be served through mergers or joint ventures. To some .extent,
this is already happening (e.g. collaboration in R&D between
Siemens, ICL and Bull), and will be encouraged by full
- 658 -
137
implementation of Open Systems Interconnection standards. However,
there is no sign that the four manufacturers are considering any
collaboration in production, or product specialisation.
A major threat could be the Japanese, should they decide to bypass
their European partners, and sell direct to, or manufacture in,
Europe. This is clearly the US view of the situation. Most
vulnerable is probably ICL since it:
* is the most heavily dependent on public sector business and
Japanese technology
* has persisted in selling a wide product range (competitors
consider it too wide)
* has regularly been in financial trouble.
US industry experts be 1 ieve that the European manufacturers must
merge and then spec i a 1 i se in app 1 i cations and part i cu 1 ar product
groups.
8.5 Scenario
These considerations suggest the following:
* Static Price Effect: negligible.
* Restructuring Effect:
- no new entrants to the industry
- probable Japanese penetration of EC markets through direct
sales, up to 5% (US companies will be equally if not more
competitive)
indigenous manufacturers lose market share in public sector
markets, principally to IBM and other US firms. The effect
is more dramatic in France which has the most protected
market
. 659 -
138
- accelerated collaboration between EC's four manufacturers,
possibly leading to production agreements, a reduction on
the range of equipment manufactured, rationalisation of
product lines and a buy-out of ICL
- marginal improvement in the export performance of EC
manufacturers following restructuring above
price reduction and/or reduced subsidies equal to . say 5
percent of present prices.
The net employment effect will be negligible. Sales lost to EC
manufacturers will probably be redistributed to other companies with
European manufacturing facilities. In any event, the market is
growing at a rate above 10% per annum.
- 660 -
139
9. CASE STUDY 6: PUBLIC EXCHANGE SWITCHING EQUIPMENT
9.1 Industry Structure
The product under consideration is the central public exchange
switching system which interconnects local telephone lines and
connects these to long distance trunk lines. The industry has
evolved from manual, to electromechanical, and finally to electronic
switches. The electronic switch can be both analogue (which uses
sound waves for transmission) or digital (which uses pulse code
modulation to transmit information). The first digital switch was
installed in the USA by AT&T in 1976. Analogue switches are still
being oroduced both to upgrade existing systems and to service
low-volume traffic, but the digital switch has become increasingly
dominant, having greater transmission speeds. The worlds more
advanced telecommunications networks should be fully digitalised by
the end of the century.
Digital switching is seen as a key technology. For this reason,
most European governments have considered it essential to establish
an indigenous industry by subsidising the enormous costs of
developing a system. This has led to a situation where Europe, with
16% of the world market, has five indigenous systems, whereas the
USA, with 40% of the market, has three, of which two are dominant.
The leading European switching systems are as shown in Table 9.1.
Table 9.2 indicates which systems are installed in the five EC
countries under review, sets out market shares, and identifies the
manufacturers. This shows that the market has been opened in each
country to at least one foreign company. However, as Table 9.3
demonstrates, the indigenous manufacturers retain a dominant market
share.
- 661 -
140
TABLE 9.1 -MAIN EUROPEAN DIGITAL SWITCHING SYSTEMS
Country System Company
France E-10, MT20 Alcatel (now also owner of ITT'S System
12 technology)
Germany EWSD Siemens
Italy UT-10 Italtel/Telettra
UK System X GEC/Plessey
Sweden AXE Ericsson
Source: WS Atkins Interviews
Profiles of the leading manufacturers are set out in the following
paragraphs:
Belgium:
* Bell Telephone Manufacturing (BTM): which was an ITT
subsidiary, and now part of Alcatel NV. BTM is one of four
companies in Europe manufacturing ITT's System 1240 (the
others are SEL in Germany, FACE in Italy and SESA in Spain).
A recent agreement with the Be 1 gi an RTT gives BTM 67% of the
market from 1987 to 1992, but it is not entirely dependant on
the domestic market. Sales have been made to Denmark, Norway
and Switzerland
* ATEA NV: which manufactures the GTD-5 switch. ATEA was
formerly a subsidiary of GTE, but has since been taken over by
NTB which is 80% owned by Siemens and 20% owned by GTE. ATEA
is now responsible for marketing Siemens switches to Belgium,
and may eventually abandon manufacture of the GTE system.
- 662 -
TABLE 9.2 - DIGITAL SWITCHES INSTALLED IN
BELGIUM, FRANCE, GERMANY, ITALY AND THE UK (1987)
Country
Belgium
System
Technology
Market Share
Manufacturers
Holding Co
France
System
Technology
Market Share
Manufacturers
Gennany
System
Technology
t1arket Share
Manufacturers
Holding Co
Italy
System
Technology
Market Share
Manufacturers
Holding Co
UK
System
Technology
Market Share (3)
Manufacturers
System 1240
ITT
67%
BTM
Alcatel NV
ElO
Alcatel
84%
Alcatel
EWSD
SiemPns
7 ~ ' 0 '
07o
Siemens/
Telenorma/
DeTeWe
UT-10
Italtel/
Telettra
55%
Ita lte 1 I
Telettra
System X
GEC/Plessey
85%
GEC/Plessey
Systems In Use:-
GTD-5
GTE
33%
ATEA
NTB ( l)
MT20
Thomson
16%
CGCT, Alcatel
System 1240
ITT
25%
SEL
Alcatel NV
AXE
Ericsson
19%
Fatme
System Y
(AXE)
Ericsson
15%
Thorn-Ericsson
I
I
AXE
I Ericsson
I 0% (2)
I Matra-
I Ericsson
I
System 1240
ITT
14%
Face
Alcatel NV
Source: WS Atkins
141
GTD-5
GTE
12%
GTE
NTB
Notes: 1 NTB is a holding company made up of Siemens (80%) and GTE (20%).
2 Ericsson has recent acquired CGCT, and now effectively holds
their 16% of the French market.
3 Refers to British Telecom network. Northern Telecom has sold
its DMS-100 switch to Mercury Communications.
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- 664 -
143
France:
* A lcate 1 : which is the product of a merger of the
teleconmunications assets of CGE (CIT-Alcatel) and those of
Thomson in 1985. Alcatel manufactures the well established
E -10 switch and the Thomson MT20 (which may be phased out) at
two factories. On January 1st 1987, Alcatel merged with the
teleconmunication interests of ITT to form Alcatel NV which is
registered in Holland and headquartered in Belgium. The CGE
(privatised in 1987) has a controlling 55.6% interest in
Alcatel, while ITT retains a 37% share (the Societe Generale
de Belgique has 5.7% and Credit Lyonais 1.7%). This gives
A lcate 1
Europe.
24m of
contra 1 over System 1240 and ITT's subsi diaries in
Its portfolio stands at 39 million lines installed -
E-1 0 and 15m of System 12 - making it the 1 argest
manufacturer of digital switches in the world.
* Compagnie Generale de Constructions Telephoniques (CGCT}:
which was owned by ITT until its nationalisation in 1982. It
retained a 16% share of the market from the French DGT, but
has recently been sold off to Matra-Ericsson Communication (a
joint venture between Matra Communications of France and LM
Ericsson of Sweden), following unsuccessful bids from AT&T,
Siemens, Northern Telecom, Italtel and Plessey. Switches
manufactured under the Thomson licence will now be replaced by
AXE.
Germany:
* Siemens: which developed the advanced EWSD switch, and has 45%
of the German market. Siemens entered into a joint (50:50)
venture with GTE in 1986 to improve market access. Siemens
hoped at the outset to persuade GTE to abandon manufacture of
its own switch in Europe, but the agreement now is that GTE
facilities in Belgium and Italy will market both systems and
manufacture the one which proves more successful. Siemens has
two manufacturing facilities for digital switches.
- 665 -
144
* Telenorma: which was granted approval to manufacture the EWSD
switch in 1986 at its Limburg facility. It has 12.5% of the
German market.
* DeTeWe: which also manufactures the ESWD switch under licence,
and has 12.5% of the German market.
* Standard Electrik Lorenz (SEL): which is an ITT subsidiary,
and now part of the Alcatel NV group. It currently
manufactures System 1240, and has about 30% of the German
market.
Italy:
* Italtel: which is owned by IRI. Italtel, formerly a
manufacturer of electromechanical switches under licence from
Siemens, collaborated with Teiettra and GTE to rleve!op the
Proteo UT-10 switch, in return for granting GTE access to the
Italian market. Italtel, which produces over 90% of the UT
switches, merged-with Telettra in 1987 to form Telit (which is
48% owned by IRI, 48% by Fiat and 4% by Mediobanca), primarily
to rationalise production and development.
* Telettra: which is owned by Fiat and now part of the Te 1 it
Group.
* Fatme: which is a subsidiary of SETEMER, a holding company 70%
owned by Ericsson. FATME manufactures Ericssons AXE switch
for the Italian market.
* Alcatel Face: which was originally a subsidiary of ITT,
manufacturing System 1240 switches (then known as Face
Standard).
- 666 -
145
United Kingdom:
* Plessey Telecommunications: which developed System X for
British Telecom. Plessey manufactures the switches at
Liverpool and takes roughly 50% of System X orders each year.
Plessey now owns Stromberg-Carlson in the USA, but sales of
System X are largely confined to the UK.
* GEC Telecommunications: which manufactures System X at
Coventry, and participates in its further development. STC
dropped out of the System X project in 1982.
* Thorn Ericsson: which is a 41% owned affiliate of LM Ericsson
Telephone Company. Ericsson is the second supplier of digital
switches to British Telecom and has teamed up with the British
company Thorn EMI to assemble its AXE switches in England
under tht: name .. System Y''.
In October 1987 a proposed merger between the telecommunication
interests of GEC and Plessey has been announced. Northern Telecom
has also bought an interest in STC plc,. which manufactures
telecommunications equipment (but not, at present, digital public
exchange switching equipment) and is also the owner of ICL, the
computer manufacturer. Northern Telecom supplies some switching
equipment to the second private sector network, Mercury.
9.2 Competitiveness
It is generally recognised by industry specialists that the world's
leading manufacturers of digital switches are currently AT&T,
Northern Telecom and Ericsson, considering both price and
performance. The industry in the European Community is
characterised by the following:
* late development: indigenous switches were not installed in
Germany until 1983, and 1985 in the case of the UK (compare
1976 for the USA)
- 667 -
146
* the relatively large cost of developing systems: the cost to
EC States of developing digital switches .is calculated at
$7 billion against $2.5 billion for US companies. System X
cost $1.4 billion to develop against $0.75 billion for AT&T's
ESS-5, and $0.5 billion for Ericsson's AXE
* limited export orders in major markets: System X, for example,
has failed to win sizeable orders outside the UK
* orientation towards heavily protected domestic markets.
However, EC
competitiveness.
NV and Siemens.
manufacturers do vary significantly in their
The two most competitive are thought to be Alcatel
Alcatel NV is singled out because:
* the E -10 switch was deve 1 oped ahead of the competition in
Europe, and while relatively unsophisticated, it is reliable
and efficient, and has won a large volume of export orders.
The development of the switch was much assisted by the massive
investment in digitalisation undertaken by the DGT, also ahead
of the rest of Europe. The E -10 now commands 20% of the
world's installed base of digital switches.
* Alcatel's merger with ITT makes Alcatel NV the world's largest
supp 1 i er of d i gi ta 1 switches, and gives it instant access to
ITT markets around the world.
* Alcatel NV now possesses two different but compatible products
which have both been successful, the reliable unsophisticated
E-10 and the highly advanced System 12.
Siemens is singled out because:
* the EWSD switch, while a late developer, has been successfully
i nsta 11 ed in a number of markets and is now recognised as a
technological leader
- 668 -
147
* the joint venture with GTE gives Siemens easy access, via GTE
subsidiaries, to several European markets and more
importantly, the USA.
A comparison of domestic prices would suggest a rather different
scenario, however. Current domestic prices appear to be around:
$250/line (France), $400/line (Belgium), $300 to $400/line (Italy),
$225 (UK) and $500/line (Germany) (see footnote). This would
suggest that Siemens is not competitive. However, these differences
reflect little more than state subsidisation of development costs
which vary between countries in phasing and volume. It is generally
believed that the marginal cost of producing switches is roughly the
same in each country, and in most cases competitive with the current
US domestic price which is reported to have recently fallen to
around $100/line.
Thus the key factors in determining are technology
(performance and reliability) and market access. The latter will
become increasingly important as the market for digital switches
slows down and over-capacity develops. It is generally believed
that there will be room for only three European manufacturers by the
turn of the century. For this reason, there has been in recent
years intense competition among manufacturers to increase their
market shares through acquisitions and mergers. As Table 9.4 shows,
the most successful have been Alcatel, Ericsson and Siemens.
9.3 Economies of Scale
Tab 1 e 9. 5 shows the cost structure reported by five firms. This
highlights the following important features:
* R&D accounts for a large percentage of total costs, averaging
around 20%
* material costs are important, accounting for two thirds of
direct manufacturing costs (which constitute 40-60% of total
costs).
- 669 -
TABLE 9.4 - RECENT MERGERS, JOINT VENTURES AND ACQUISITIONS
IN THE EUROPEAN PUBLIC SWITCHING INDUSTRY
Date Activity
1985 France merges the telecommunications assets of CGE
(Cit-Alcatel) with Thomson to form Alcatel
148
1985 AT&T and Philips (Netherlands) form APT to adapt the
ESS-5 switch to the European market. Philips
abandons development of its own PRXD switch
1986 GECs bid for Plessey is blocked by the UK
government; discussions continue on collaboration in
the manufacture of System X
1986 Siemens and GTE joint venture
1987 Alcatel acquires ITT
1
S telecommunications interests
to form Alcatel NV
1987 Ericsson acquires CGCT
1987 Italtel and Telettra propose a mP.rger to form Telit
(since abandoned)
1987 Ericsson joint venture with Telit (or Telettra or
Italtel) expected
1987 GEC and Plessey merger proposed
1987 Northern Telecom buys 27.5 percent of STC
Source: WS Atkins
Labour
Materials
Overheads
R&D
Total
TABLE 9.5 - COST BREAKDOWN IN SWITCH MANUFACTURE
(% of production costs)
Firms
A B c D E
25 30 22 20 27
40 35 40 45 35
15 13 20 18 13
20 22 18 17 25
100 100 100 100 100
Source: WS Atkins interviews
Average
25
39
16
20
100
- 670 -
149
These figures suggest the short run economies of scale for public
switches shown in Table 9.6.
TABLE 9.6 - SHORT RUN ECONOMIES OF SCALE IN SWITCH MANUFACTURE
(present output = 100)
Output 100 110 150 200
Labour 25 26.7 33.2 40.6
Materia 1 s 39 42.5 56.2 72.8
Overheads 16 16 16 16
R&D 20 20.8 23.5 26.4
Total Cost 100 106.0 128.9 155.8
Average Cost 0.97 0.86 0.78
Incrementa1 Cost 0.60 0.58 0.56
Note: Labour
=
(present labour) x (volume)
0

7
R&D
=
(present R&D) x (volume)
0

4
Materials
=
(present materials) x (volume)
0

9
Economies of scale would arise mainly in R&D, software development
costs, and to a lesser extent in labour costs and the purchasing of
components. The figures suggest that a doubli'ng of output would
generate economies of scale in excess of 20%. However, the maximum
savings likely to be realised will be closer to 15 to 20%. The
reasoning underlying this conclusion is as follows:
* the weakest suppliers of systems may exit the industry so that
say one third of the European market will be available to the
surviving producers. Assuming that import penetration remains
at current levels, the surviving EC manufacturers should be
able to expand output by about 50% each.
* the surviving producers may rationalise their assets to
concentrate production in fewer factories. If some 20% of
existing factories were closed down, the remaining facilities
would be able to expand production by about 25%. Taking exits
- 671 -
150
and rationalisation into account survivors could increase
production by 75%. At current levels of capacity utilisation,
this would require some additional investment, but it is
likely to be small. This would give manufacturers economies
of scale in the order of 20%.
* these potentia 1 savings will be offset to some degree by the
cost to the surviving producers of adapting systems to new
markets. It is estimated that these could amount to 10-20% of
the basic development costs, equivalent to a few percent of
average costs.
It is of course possible that significant economies could be
achieved without restructuring of the industry, through:
* co 11 aborati on in R&D (there is a 1 ready an R&D joint venture
between Plessey, Siemens, A1catel and Ila1tel. in addition to
the RACE, ESPRIT and BRITE projects)
* collaboration in marketing and purchasing (GEC and Plessey
were moving in this direction before the announcement of their
merger proposals).
Restructuring of the industry, however, will have a major impact on
future costs when the next generation of switches comes on-stream.
Massive savings will then be realised in development costs (a recent
study by London Business School calculated that British Telecom's
decision to subsidise the development of System X in preference to,
for example, installing Alcatel's E-10 switch, added 10% to
consumers' telephone bills mainly due to continued purchasing and
maintenance of obsolete equipment because of the delay in installing
digital equipment).
Since R&D is around 20% of most firms' costs, and overheads around
15%, restructuring of the industry should lead to savings in these
items, which represent long run economies of scale of around 10%.
- 672 -
151
9.4 Effects of Opening Up Public Procurement
EC markets for public switches are not entirely closed to foreign
competition. Each of the countries with indigneous manufacturers
has allocated segments of their market to foreign suppliers eg.
France (16%), Germany (25%), Italy (45%), UK (15%). Nevertheless,
it remains very difficult for suppliers to win business from
indigenous manufacturers. Preferential procurement policies are the
major barrier, but the non-compatibility of systems and adaptation
costs are also important factors.
It is now generally recognised that the decisions taken by
governments to develop indigenous technologies has created a surplus
of both systems and producers which the industry must rectify to
remain viable. The acquisitions,
initiated in the past few years
mergers and joint ventures
reflect this concern among
manufacturers. Further
accelerate this process,
standards.
o p n ~ n g of pub1ic sector markets will
as would full harmonisation of technical
If the markets were opened fully, domestic prices would fall to
international levels, perhaps $150 per line taking into account
adaptation costs, and the fact that the US price of $100 a line is
considered by some to have fallen below average costs as a result of
cut-throat competition. Most EC producers appear capable of
competing at this price in third markets, but is unknown to what
extent this capability is dependent on subsidised domestic prices.
Clearly, though, those manufacturers who are heavily or entirely
dependent on domestic markets are vulnerable to increased EC
competition.
A possible scenario is that the weakest producers will either exit
the industry or become manufacturers of other systems. This would
enable the surviving producers to seize the market shares necessary
to remain competitive in both price and product development.
However, it is unlikely that this process will be quick or smooth
enough to prevent significant import penetration (mostly from the
USA, Canada and Sweden).
- 67 3-
152
9.5 Scenario
The above considerations suggest the following scenario:
* Static Price Effect: domestic prices fall 40% (France), 60%
(Belgium), 70% (Germany), 50% (Italy) and 30% (UK).
* Restructuring Effect: the number of EC producers is narrowed.
Substantial economies of scale are realised through expanded
market shares and rationalisation of manufacturing facilities
(15-20%) and savings in R&D and overheads (10%).
* Import penetration: increases from the present 8% to say 20%.
* Exports: improve as producers take advantage of economies of
sea 1 e.
Footnote on prices per line:
Price comparisons are difficult because of secrecy, differing
treatment of R&D costs and the fact that prices are falling rapidly.
The following. data were used, and were checked with US Dept of
Commerce experts.
Belgium: new contract 1987-1990 at BFrl6000/line (Source: interview
data, plus press reports eg FT 19 Oct 1987)
France: estimate from interview data (
11
competitive with UK
11
) US$250
approx (1987)
Germany: $500/line (interview data, plus Economist 29 Aug 1987)
Italy: $300-400 (no firm- data; interview data suggests prices
higher than France, lower than Germany
UK: 1987 System X prices 140 {Source: P. Grindley .. System X:
the failure of procurement .. London Business School 1984)
US: 1986 prices $200-$280 (Source: US Dept of Commerce: A
competitive Assessment of the US Digital Office Switch
Industry)
1987 price $100 (Source: interviews, plus Economist 29
Aug 87)
- 674 -
153
10. CASE STUDY 7 TELEPHONE HANDSETS
10.1 Industry Structure
Within the EC countries under review the principal manufacturers of
telephone hand-sets are as follows:
* Belgium SA Philips, BTM, ATEA
* France Alcatel, Matra Communication
* Germany Siemens, Telenorma
* Italy Italtel, Marconi Italiana
* UK
Plessey, GEC, STC
These are the same firms which manufacture public switches, with the
exception of SA Philips (a subsidiary of Philips N.V. of Holland),
Matra Communication (a manufacturer of PAsxs and customer premises
equipment), Marconi Italiana (a subsidiary of G ~ C , and STC (part
owned by ITT, and a manufacturer of a wide range of
telecommunications products).
Indigenous manufacturers have traditionally been protected from
competition by the PTTs, which retain control over the testing and
approval of products, and their marketing to end-users. PTTs can
set specifications, use the approval process, or simply exclude
competitors in order to support national producers. This policy has
led to the development of unnecessarily high engineering standards,
and thus prices within the EC which are far in excess of the
competition.
. 675 -
154
The situation has now changed somewhat. In Belgium, France, Germany
and Italy the PTTs have established a two-tier market. The
procedure is that consumers must rent their first telephone from the
PTT; this is generally manufactured to high engineering standards
and acquired from an indigenous manufacturer. Additional terminals
may be purchased either from the PTT or retailers. The latter can
now sell imported models which have been approved by the PTT.
Approval regulations have been relaxed to grant recognition to
products manufactured to different standards. The result has been
that indigenous manufacturers, while at present still assured of a
market through the PTTs, must compete in the private sector market
with imports which are generally considerably cheaper.
In the UK, deregulation has gone much f u r ~ h r in three respects:
* there is no longer any requirement for consumers to purchase
or rent telephones from British Telecom (BT)
* approval and testing of products is now handled by BABT, which
is independent of BT
* BT, in collaboration with British manufacturers, has brought
its standards more in line with international norms
The results of this have been as follows:
* BT no longer buys all its telephones from British
manufacturers (the latter currently command a 70% market
share) .
* British manufacturers are no longer entirely dependent on BT:
the three suppliers sell around 50% of their products directly
to the private sector.
* British products are roughly price competitive with equivalent
Far East imports.
- 676 -
155
10.2 Competitiveness
Telephone assembly is a relatively simple procedure requiring little
investment in technology and capital equipment. It can, however, be
done either with very labour intensive methods, or by using modern
automatic component insertion machines. The industry has been
1 arge ly re 1 ocated to SE Asia where producers can minimise 1 abour
costs. A combination of the higher engineering standards and higher
costs in Europe means that EC products are, in general, two to four
times as expensive as Far East imports with equivalent performance
specification.
On the other hand, British manufacturers claim to be competitive
with imports, having reduced the price of a standard telephone
supplied to BT from 38 (54 ecus) to 15 (21 ecus). This has been
accomplished both by lowering standards and investing in automated
is now net very expensive. Some other EC producers
are still using manual methods.
The prices of telephones have been investigated in the price
analysis described in Section 3. This showed the following relative
prices:
France 260
Germany 220
Belgium 190
UK 130
Italy 100
After allowing for transport, trading and procurement costs for a
typical contract, the following potential savings from trade were
shown (see Appendix II):
France 41%
Germany 37%
Belgium 27%
- 677 -
156
Note that these savings arise by buying from Italy, where the price
is lower because of strong competition from Far East imports. Equal
or greater savings would probably be made by buying from Far East
suppliers.
10.3 Economies of Scale
All the major producers are reported to be operating at or near full
capacity. A sizeable increase in sales would require successful
producers to expand on site, invest in automatic equipment, develop
new facilities or make acquisitions. It is thought that significant
economies of scale can be achieved in labour costs, R&D and
purchasing of components.
Table 10.1 show the reported cost structure for four firms. This
indicates the short run economies of scale shown in Table 10.2.
TABLE 10.1 -COST STRUCTURE IN TELEPHONE HANDSET MANUFACTURING
(% of production costs)
Firm
A B c D Average
Labour 24 30 18 22 24.
Materials 55 45 55 50 51
Overheads 11 14 15 18 15
R&D 10 11 12 10 11
100 100 100 100 100
Source: WS Atkins' interviews
- 678 -
TABLE 10.2 - SHORT RUN ECONOMIES OF SCALE IN TELEPHONE
HANDSETS
(current output = 100)
Output 100 110 150
Labour 24 25.4 30.6
Materials 51 55.6 73.5
Overheads 15 15.7 18.4
R & D 11 11 11
Total Cost 100 107.7 133.4
Average Cost 0.98 0.89
Investment Cost 0. 77 0.67
Note: Labour = (present labour) x (volume)
0

6
Materials = (present materials) x (volume)
Overheads = (overheads) x (volume)
0

5
0.9
200
36.4
95.2
21.2
11
163.8
0.82
0.64
157
The figures suggest that a doubling of output would reduce unit
costs by nearly 20%, with the existing technology, which was the
figure most commonly reported by the manufacturers.
If faced with the prospect of a greatly enlarged market, however,
firms would invest in automatic assembly. This offers the prospect
of greatly increased productivity, and a large fall in average
costs. The degree of saving or the scale of production required is
not known, but may well be of the order of 50 percent if volumes are
1 arge enough.
10.4 Effects of Opening Up Public Procurement
There is at present very 1 itt 1 e trade in te 1 ephones between EC
countries with indigenous manufacturers. Suppliers find it almost
impossible to win approval for new products from foreign PTTs.
- 679 -
158
The real barrier to trade is the control over the equipment approval
process exercised by the PTTs. A requirement for purchasers to
advertise tenders internationally and increase the transparency of
the procurement process is not likely to have any effect until the
monopoly enjoyed by the PTTs over testing and approval is broken.
Deregulation should bring EC national standards closer both to each
other and to international norms. Should the requirement for
consumers to acquire their first phone from the PTT be abandoned,
this will bring EC products into direct competition with imports.
In the UK, this has led to increased import penetration, but the
indigenous manufacturers claim to have improved their
competitiveness dramatically in the process, and increased sales to
third countries. In the USA, however, Far East manufacturers have
taken advantage of deregulation to undercut domestic prices and
dominate the market. Severa 1 US producers have 1 eft the fie 1 d to
focus attention on higher value product lines.
Te 1 ephones, however, _ are an exce 11 ent ex amp 1 e of a product with
endless scope for product differentiation. As well as incorporating
different telephone facilities (visual displays, redial and storage,
timing etc), it has an aesthetic function (colour, shape), can be
adapted to different use environments (phone booth, desk top, wall
hung, car, fire-safe) and combined with other instruments (work
station, clock). There will always, therefore, be scope for many
manufacturers, and opportunities for new entrants.
10.5 Scenario
The above considerations suggest the following scenario:
* Static Price Effect: Prices fall as calculated in Appendix II,
but only if product approval is removed from the PTT's
control:
France 41%
Germany 37%
Belgium 27%
- 680 -
159
* Restructuring Effect: All producers will suffer declining
market shares as imports rise; this will give rise to some
restructuring as manufacturers abandon telephones for more
profi tab 1 e product 1 i nes where techno 1 ogy and product
development are more important factors, and others take action
to reduce unit costs (e.g. investment in automation and
robotisation, or relocation of production offshore). The
number of EC manufacturers will dwindle; the more efficient
companies should improve their performance in Europe.
* Import penetration: will rise slightly in the UK and Italy,
and by between 40% and 60% in Belgium, France, and Germany.
* Exports : the remaining, efficient, automated EC producers
should become more competitive in the growing export markets.
* Employment effect: EC employment. would fa11 in a static
market by probably 30-50% because of import penetration and
automation, but this fall is likely to be offset by rapidly
growing markets at home and for export. The overall rapid
growth in customer premises equipment expected over the next
decade is likely to mean growing employment for the European
industry, as long as it remains competitive.
- 681 -
160
11. CASE STUDY 8: LASERS
11.1 Industry Structure
11 . 1 . 1 Product
A laser is an instrument which emits coherent light.
Lasers are a high technology product, subject to extensive basic and
applied research, for which new applications are still being
developed. They are products of the optoelectronics industry.
Lasers can be classified in several ways into very many different
types:
* by the light emitting material: gas lasers, solid-state
lasers, semiconductor lasers, chemical lasers - and within
each of these classes by the particular combination of
materials used
* pulsed/continuous lasers
* by power output.
11 . 1 2 Markets
The users of lasers are mainly in the public sector, and most
research is pub 1 i c ly funded, a 1 though they are most frequently
procured as components by equipment manufacturers who in turn se 11
to the public sector. The applications are:
* telecomnunications - as emitters in optical fibre networks,
and also used in the manufacture, inspection and repair of
equipment, and for welding optical fibres
- 682 -
161
* defence - as a weapon (notably being deve 1 oped in the USA's
SDI programme), and for range finding, target identification,
training systems, sensing systems, and special communications
applications
* medical for incision, eye operations, physiotherapy,
diagnosis, and cosmetic treatments
* industrial - for cutting and welding, measuring and surveying,
holography, and in leisure products.
The first three app 1 i cation areas predominate at present and have
public sector customers, but industrial applications are growing.
Lasers were invented in the 1960s, and applications are still being
found. Many manufacturers began in the 1970s, and the establishment
of new manufacturing capacity has exceeded the growth in markets, so
there is at present excess c p c i t y ~ but the market is growing
rapidly in many sectors.
In each case, there are three stages of manufacture: making the
active components; assembly of the active component into an
instrument with the necessary power supply, electronics, optical
focussing, and casing/mounting; and then integration of the laser
into the application system, such as a machine tool, weapon system,
fibre optic cable system, or whatever. These three stages may be
done by the same or by different firms.
The dominant applications and the areas where high growth is
expected in the near future are teleconmmunications for optical
fibre networks, and defence.
The total world market for laser instruments is estimated by one
firm as US$0.5 billion.
- 683 -
162
11.1.3 Firms
The industry is very heterogeneous, with many firms producing many
products for many applications. There are some large firms, but
also many small and medium sized enterprises, unlike any of the
preceding case studies where large firms dominate. It is an infant
industry with many new entrants. Some firms run into fi nanc i a 1
difficulties because new application markets do not grow as
expected, or because of underfunding. Many new firms are set up to
exploit a new type of laser or a new application, by people leaving
university or government research programmes.
An exhaustive survey of firms has not been attempted. Firms
mentioned by interviewees as being major competitors are 1 i sted
below. By definition this excludes small firms of which there may
be a couple of thousand. There are few firms with laser turnover
exceeding 1 million ecus.
* CBL Optronics NV, based in Belgium, and forming subsidiaries
in France and Germany, with a joint venture in USSR. Makes
military products (e.g. rangefinders), metal cutting machine
tools and medical lasers.
* Cilas Alcatel of France, subsidiary of Alcatel NV, the largest
EC telecommunications equipment manufacturer.
military and telecommunicationss products.
* Quantel of France.
* Siemens mainly in industrial applications.
Cilas make
* Messer Griesheim, Trumpf, Baystronics, Rofin Cinon, all in
Germany.
* Valfibre and WIFO in Italy.
* Ferranti of UK, a leader in military applications.
- 684 -
163
* Plessey and STC of UK, in the telecommunications field.
* Coherent General of USA has manufacturing in Germany.
* Lumonics of Canada has an important subsidiary in UK, JK
Laser, mainly in industrial applications.
* CIBA-Geigy/Spectraphysics manufacturing in USA.
* Lasag of Switzerland.
* Philips in Netherlands.
* In Japan, four firms dominate the market in components and
applications: NEC, Fuji, Hitachi and Toshiba.
11.2 Competitiveness
The world market for lasers is extremely competitive. It is also
highly differentiated, with many firms having a market niche for a
particular application. Most firms sell world-wide, and know their
customers well. The world of the laser-literate, as one interviewee
described it, is small. It is not possible to compare prices of
application systems, but for components it is reported that the
Japanese are price leaders, and all other manufacturers meet the
Japanese price.
11.3 Economies of Scale
Most firms are operating on a jobbing basis, producing prototypes or
very small runs, particularly in industrial applications. The point
at which significant economies of scale can be reached is a long way
off. In the short term in fact there may even be diseconomies of
scale, as small entreprenuerial firms pass to become managerial
firms.
- 685 -
164
This is not the case with those applications where demand has
reached the take off point for series production, particularly the
small telecommunications semiconductor lasers. For these, doubling
of production could reduce costs by 20-30%.
11.4 Effects of Opening Up Public Procurement
Suppliers report that they find the markets for 1 asers very open,
with the sole exception of France, where several producers reported
that local producers are favoured directly and indirectly. One
producer reporting have a contract cancelled in France by the
responsible Ministry, because there was a French producer, although
the French producer had no equivalent product. The purchaser,
however, then rented the equipment from the foreign supplier,
instead of purchasing. As a further ex amp 1 e of French
protectionism, it was claimed that the PTT is developing local area
fibre-optic networks before trunk routes in France, because there is
not yet a suitable French product for trunk routes.
With this one exception, however, no producers though that public
procurement changes would have any effect on trade, prices or the
industry structure, because:
* most countries are open to buy the best available product
* suppliers are export oriented and know the customers
* most sales are made to assemblers of telecommunication
systems, defence systems, or other equipment manufacturers,
who are commercial and unbiased
* markets are very competitive with no margin for price
reduction
- 686 -
165
* there are no gains to be made from mergers at present, since
there is little duplication of capabilities. This will change
in time as the markets begin to develop and mature, and there
could be savings in marketing effort, development costs and
production economies. This is probably a few decades away.
11.5 Scenario
* Static Price Effect: no effect.
* Restructuring Effect: no effect.
- 687 -
166
12. POTENTIAL SAVINGS IN PUBLIC EXPENDITURE
12.1 Introduction
This section sets out the detail of the calculations of the
potential savings in public expenditure. The overall methodology
was described in the Sunmary (Section 1) and the detai 1 s of the
estimation of potential savings for individual products were set out
in Section 3 (price comparisons) and in Sections 4 to 11 (the case
studies). In addition, Appendix II set out the details of the
calculation of savings thresholds and individual products savings
factors.
The calculations are carried out using a spreadsheet model. As well
as the base case described throughout the report, a series of
sensitivity analyses have been carried out.
It should be recalled from Section 1 that the savings are estimated
in terms of:
* the static trade effect - by buying from the cheapest
supplying country at present prices
* the competition effect - reduction in prices from national
producers who are faced with foreign competition for the first
time. It is assumed that these price reductions can be met by
reduction in real production costs, by investment in new
technology or by eliminating x-inefficiency
* the restructuring effect - the long run saving arising from
economies of scale, including shared R&D and distribution
costs, following industry restructuring in certain key sectors
dominated by public sector purchasing.
- 688 -
167
12.2 Formulae Used in the Model
Savings are estimated for each 2 digit product category (according
to the ESA R59 classification, which is similar, but not identical,
to the 2 digit NACE classification).
The estimates assume that public sector demand is inelastic, so that
the total volume of purchases is unchanged after opening up the
markets. Initially there is, for each country and each
volume of purchases (Q) from both local suppliers and,
importers, but all sold at competitive prices (p). This
has a statistical distribution for different purchases,
product, a
possibly,
home price
different
locations, and different moments in time, and differences in product
quality are reflected in corresponding differences in product price.
The price ( p) is interpreted as the mean (expected) home market
price, and there is assumed to be no difference between prices of
identical products from a manufacturer and an importer.
After opening up the market there are new imports (M) at a lower
price (pm).
Most of the products are manufactured capital goods, which are
differentiated products, with monopolistically competitive markets.
Local producers need not necessarily meet the new import price. The
new import may be a different quality product suitable for some
applications and not others. In some cases local manufacturers may
produce a substitute for the new import and displace it so that the
trade effect ends up with no change in trade. In general,
however, local producers may change their price to the home market
by an amount dpc - the competition effect.
Finally, after restructuring, all prices may fall by an amount dpr -
the restructuring effect. It is assumed for simplicity that price
differentials are maintained and all producers reduce prices by the
same amount.
- 689 -
168
The formulae used are derived as shown below, for each country and
each product.
* Initial public purchasing = pQ
where Q = total volume of purchases from both local producers
and importers
p = initial mean home price of both local producers and
importers.
* After opening up markets, expected public purchasing
where M = new imports
Pm = price (delivered) of new imports from foreign
immediately after opening up
dpc = change in price of local suppliers due to new
competi_ti on
dpr =change in price of all products
* Savings = initial purchasing - expected purchasing
*)pQ
td:?PQ
........ trade effect
........ competition effect
........ restructuring effect
- 690 -
* defineLl= static price saving = p-pm
p
so ( 1 A) = P
.!....ffi
p
= change in import penetration =
pQ
so M = .E._ Q = JL
Q Pm ( 1-d)
R = -dp
-r
p
also, by hypothesis:
169
-dp previously protected public sector suppliers
c
= 0 for other supply sectors
* Then:
Trade effect = t_:aA .e 7<
Competition effect =
(O
Restructuring effect = o r..
"f..,.
for protected
sectors
otherwise
12.3 Data Used
With the exception of the change in import penetration, the required
data for the calculation of the potential savings have been derived
in previous sections of the report.
* the price savings factors, are set out in Tab 1 e 12. 1.
Details of the calculation are shown in Appendix II. The
potential savings for each 2 digit R59 category have been
derived by a weighted average of the products for which
specific price savings factors were calculated. The weights
- 691 -
170
TABLE 12.1- POTENTIAL SAVINGS FACTORS
---------------------------------------------------------------------------------------------------------
ESA Category descnption EELSIAN ;:ENCH UK
Category FACTOR FACTOR F'ACTGR
---------------------------------------------------------------------------------------------------------
010 Agrictil t11nl, fore'> try fishery products
031 Coal and coal briquettes
033 Lianite (brmtn coall !nd llgnite bnquettes
050 Products of coking
071 Crude oetr.Jleua
073 Refined petroleu products
075 Natural gas
095 Water (collection, purification, distribution!
097 Electric power
098 "anufactured gases
099 Steat, hot Mater, coapressed air
110 Nuclear fuels
135 Iron ore and ECSC iron and steel products
136 Non-ECSC iron and steel products
137 Non-ferrous aetal ores; non-ferrous aetals
lSI Cetent, lise, plaster
153 Glm
155 Earthenware and ceraaic ?roducts
157 Other unerals and denved products inon-tetallicl
170 Che1ical products
190 "etal oroducts
210 Agricultural and industrial
230 Off1ce tachines, etc.
250 Electrical oocds
270 l'lotor 'll?lndes and
290 Other transport equiptent
310 Meat ind aeat products
330 Milk and diary products
350 Other food products
370 Beverages
390 Tobacco products
410 Textiles !nd clothina
4.30 leathers, leather and skln goods, aotwear
450 Titber and wooden furniture
471 Pulp, paoer, board
Paper goods, products of or1nting
490 Rubber ind plastics products
S l 0 Other tanl f.lc turing products
Build1ng and ClVll enginnering works
550 Recoverr and repair service'>
570 Wholesa e and retail trade
590 lodging and oterina servic'!s
oil Ra1lway transport services
b13 Road tnnsport services
bl7 Inland Materwavs services
Hari tiu ind coastal tnnsport ser'i ices
633 Air transoort services
o50 Auxilliry trtn'3port services
biO Cottunications
Credit and insurance
710 Business services provided to
730 Renting of iJtovable goods
750 "arket services of education and research
770 "arket services of health
7qo "arket services n.e.c.
910 General public services
850 services of education and research
890 Non-arket services ot health
930 services n.e.c.
SS:t
117.
lOX
1)%
m
m
10%
107.
o;:
ll

a
.,
'
27.

m
b7.
4%
87.

.:,x
!07.
10%
m
57.
10'1.
37.
15'1.
IY
.,,
m
lOX
1)7,
17.
7'1
277.
1-l'!.
',.
1/ '
lb%

t)l
407.

37.
57.
L"
"'"
I
.. ,
Jh
---------------------------------------------------------------------------------------------------------
Source: Table 3.3
- 692 -
171
used are the consultants estimates of the relative importance
of each product as a paradigm for other similar products in
the product group, for example:
other transport equipment includes aerospace,
shipbuilding and railway equipment, which is more like high
value high technology ~ l e t r i locomotives (weighting 0.75)
than low technology goods wagons (weighting 0.25)
'electrical equipment in public purchasing is
approximately 30% power generation, 30% telecommunications
equipment, 40% other; hence the weightings shown in Table
12. 1
For manufacturing sectors of relatively low importance in the
total, the savings factors have been taken as a weighted
average of other sectors, as follows:
- agricultural and industrial machinery: taken as metal
products (0.5) and 'electrical equipment (0.5)
- 1 eather goods, rubber and p 1 ast i cs, other manuf act uri ng:
taken as an average of a 11 other manufacturing sectors,
weighted by their share of total public purchasing
'building and civil engineering (specialist works and
border areas), and 'business services; a potential saving
of 10 percent has been assumed for a 11 -countries, to give
an order of magnitude estimate
* The breakdown of public purchasing (pQ) was estimated from
1980 ESA input-output tables and other data sources, applied
to the 1984 levels of public purchasing. This was described
in Section 5 of the Part I report.
Table 12.2
The results are shown in
* The change in import penetration: is calculated as described
in the following subsection.
- 693 -
TABLE 12.2 - BREAKDOWN OF PUBliC PURCHASING BY PRODUCT CATEGORY
(billion Ecus 1984)
aescr1Pt1on
GategJry
Hl tJrestrf and oraduct-;
0:1 C6al and
!brown and br1auettas
)50 Products of cak:M
li71 GrJOe aetrJleu!l
073 Refined products
Oi5 Natural gas
095 (collectlon, purification,
QQ7
)98 gases
)Qq Stu1, hot water, Clllpressed arr
110 fuels
t:5 Iron ore 1nd ECSC iron 1nd steel oroduct;
t3b Non-ECSC iron ;nd ;tee! products
i !etal ores; nJn-errous .aeta Is
!51 Cement, l11e, ol1ster
!53 Shss
\55 Earthenware and ceri!llC ?roduc!s
157 Qther unenis i!ld den ved (nJII-tetilltc \
:70 Che!llcal products
t QQ orodJcts
ZiO Agncultural and industrial uch1r.erv
Of'ice tach1nes, etc.
ZSO Electncal goods
:10 Motor vehicles 1nd eng1nes
Qther transoort equto;ent
o Ilea t ind Jeat oroduc ts
130 and diary products
;so Other food ?roducts
Beverages
)90 Tooacco products
411) Textiles 2nd clothing
LHthers, iHther 1nd goods, footweir
Tii!lber wooden furn1 ture
Pulp, paper,
Paper goods, products of printing
l90 Rubber 1nd olistics products
510 products
530 Sutld1ng -ind civtl eng1nnenng
550 and reoatr serv1ces
570 Wholesale ind retail tride
5qo and cater1ng serv1c2s
H1 tnnsport :;ervtces
transport serv1ces
oJl7 lnlind sernc2s
b31 tue coastal tnnsport
633
:50 transport serv1c2s
6 ?0 CJuun lCittons
J90 t anti tnsurance
7trJ 9'.lsiness tJ
730 Rent1ng of 1Jaovab1e goods
serv1ces of eduntlon 1n1
FO senices Jf
services n.e.c.
a10 3enerli oubiic servtces
250 serv1ces ai edJcitiJn ind
goo services of
Q30 i:2s n. e. c.
9elgldl Franca
:o.a
:S.1
0.)
:6.7
t),;)
2197.8
t).c)
.,
.JJ.J
. .J

7
' .
.,, J
59.8
67.5
2U
., "
.;, .J
20.'3

34,/



t9i.a
1045.7
C' .. , ...

.;

u
33.9
1),1)
0.!
:13.0


1),0




J.v
1),0
6.)
4U
,),0
0.0
<),()
!) :)
'). )
:),0
(),1)
1),1)
:) I i)
:l,\_l
(, ,t)

),)
) .o
).)
). i)
:2Q. '3
= ... ,... .
.LJ.: t L
:J9.5
l!.Q
1).!)
7066.
349.5

24(H) ,2
!69.6
11)7 1:
m.a
:49,8
1
25.1

24.3
25.8
Q8, s
as: .a
Z411.2
1622.5
5il.5
4272.!
1829.3

480.8
:16.9
421.0
!14.4
l. :)
260.1)
55.1
4



551.3

i4b.9
583.4
i..,. .. .,
lJ) I I
1:88.5
1801.2
29.4


11.19.
1688.ii
:87.3
')
7na:t


f .. J I J

, '
''
1).Q
). 'J
),)
370.2

12.1

; ...... .)

SoP.:
151.4
585.6

SB.6
ao,Q
:o6.q
)26,!)
131.8
134.3
45.6
57.5
101. a
24'? .

2214,1)
2104.3
2304.7

4
..,
... ... -J

458.6

4a7.6
16.9
591.7
.)4.
27:.:)
743.6
2301.5
.)83.5
.., .. ., .,
t.. ... o, '
23534.3
.151).8
3295.0

''5.7
.... ,
:l..; o

Lt., ..
100.8

269.1
tqr:.o
!023.0
71"4,
l:C4.:



r).)
,) . 0
'). )
') .. )
itait

'Q
d'.
1596.3



tl:.o
1). ,)
7!<:1,1)
I
.,1 J, L
102: .. ;

2!).9
11)47.3
t70,3
,i)
:31.
:681.3
96i' .1
.2

,) . )
U2!.1
:976.2


:'l,:)
ta7.
43/.i

2[7,6
519.)
467,).j
zgo,)1 ,j
11,
). )

1). i
'i ,r)
).)
l. r)
172
:::u
!1 04.

3(18.3





7 ,l

:7
7


..tl l


il)3(Q
.
:.J. 1
e
.......
\ '
'.Jo.'
Source: WS Atkins calculations from ESA input-output tables and other
sources - see Part I report
- 694 -
173
12.4 Hypothesis on the Change in Import Penetration
A hypothesis has to be made about the change in public sector import
penetration for each product group at the 2 digit NACE level. Since
no reliable data exists on the current level of public sector import
penetration, and since the 1992 public sector import penetration is
pure hypothesis, an assumption was made of the maximum likely change
in import penetration as follows:
* For coal:
* For construction:
* For services:
as assumed in the case study
1 0% increase, representing border
areas and some specialist construction
10% of business services, zero for
other services (eg. maintenance,
rents, health, travel)
* For manufactured goods: After 1992 the public sector import
penetration will be similar to the
private sector at present. The latter
is not known, but data for total
import penetration of each 2 digit
sector (pub 1 i c and private purchases)
is known.
Estimates of the present level of
import penetration in the public
sector have been made on the basis of
available evidence from the Contract
data base. The implied private sector
import penetration is then calculated,
using data from the analysis of ESA
input-output tables for the ratio of
private and public sector purchasing
(using intermediate consumption as a
proxy)
- 695 -
174
The calculation of the change in import penetration for manufactured
products uses the following equations:
Taking for each 2-digit NACE category
9Av = total import penetration, from the DGII
data base (1986 or latest year available)
9PRIV = present private sector import penetration
9pus = present public sector import penetration
EPUB = public purchases of the sector output
EPRIV = private sector purchases
ETOT = total purchases
ETOT x 9 AV = EPUB x 9pus x EPRIV x 8 PRIV
whence:
and hence:
Change in import penetration 9 = 9pRIV _9pus
To arrive at the assumed public sector import penetration an
hypothesis has been made for each product by comparing the import
penetration for the whole economy (from ESA National accounts
aggregates) with the evidence from the contract database, as
follows:
- 696 -
175
Belgium France Germany Italy UK
1. National import 43%
penetration (ESA National
Accounts)
2. Apparent public sector 21%
import penetration (Atkins
database)
3. Ratio (2)/(1) 0.49
20% 22% 19% 22%
16% 12% 1% 4%
0.80 0.55 0. 05 0. 18
It has been assumed that the ratio (3) above applies to all
manufactured product sectors except:
*
11
0ther transport equipment .. which is mainly public sector
purchases already, so the average import is close
to the public sector import penetration. It is assumed that
in all countries import penetration ultimately reaches 80%, as
would be the case if production was shared between the five
countries in proportion to their market
* motor vehicles and office equipment for Belgium where import
penetration is already high. There is local assembly, but no
.. national champions ... It is assumed that public sector import
penetration is similar to the private sector and there is no
significant change
*
11
0ther manufactures .. , a spurious residual category.
change is assumed.
Tables 12.3 to 12.7 show, respectively:
* the assumed public sector import penetration
A 10%
* the average import penetration rates for each country, from
the sectoral data base held by DG-II
- 697 -
176
TABLE 12.3 - ASSUMED PUBLIC SECTOR IMPORT PENETRATION RATES
:sA N1
C1tegorv
t)!t) AgricuH,lnl, -ind fishery
.m Goal and coal briauettes
Ltgnite (brJwn coail and lignite anouettas
050 Products of
Crude ?etroleuJ
Reiined petrolaum
lhtural gas
!collection,
Electnc oower
Manufactured gases
Steil, hot water, coapressed air
Nuclear fuels
!:5 Iron and EC3C tron ind stael oroducts
136 tron and ;tee! products
137 Non-ferrous aetal ores; nan-ferrous ;etai;
!51 Ceaent, liae, olaster
153 Glass
!55 Earthenware and cera1ic products
157 Other and .jerited products (non-tetalltc
170 Chemical products
190 Metal products
:10
210 Office 1ach1nes,
250 Electr1cal goods
270 Motor vehicles ir.d eng1nes
Other transport eautoaent
3lt) 11eat and uat aroducts
330 :'!ilk and diary
ather food products
Beverages
390 Tobacco oroducts
a;o Texttles and clothing
a3o Le-1thers, luther and sk1n goods, footlleir
450 T110er turn1ture
471 Pulp, per, board
J73 Pacer goods, products of Jr1nt1ng
Rubber and p!ast1cs
5lt) Other aantJhct,lnng products
and ctvll eng1nner1ng
55Q Re:overy ind sernces
570 and retul tnde
Ladg1ng and catering
611 RaL!Kay transport servlces
6:3 Road tr1nsoort services
6'' Inland serv1ces
?1-iritite ind :oastal tr.1nsport ;ervw!s
633 transoort ;erv1ces
o5t) 4uul ury tnnsport
670 Coaunications
1nd 1nsurance
ilt) Business serVlces oroVlded to
Renttnq liMovable goods
seni;:es of education iPd
770 MarYet ;erv1cas of
serv1ces n.e.c.
310 GeMnl ouJllc :;ervlt!s
350 servtces of eaucat1on 1nd
3q0 'lon-urket ;er'JlCes Jf i,Hi th
serv1ces
3Elu!UII 6ERI'!ANY ITALY
22.27% 21.1SI
15.m 6.05%
21.m 28.7bi
ea.m n.m
2b.OOX 22.31%
49.70X 14.20%
12.60% 10.02%
22.43% 17.17%
.)8.81% 22.717.
14.21% 14.m
16.85% 12.81%
!6.40% !1.65%
12.m 21.20X
10.104 1.604
.. ""C'.,
,:.,,JJ.
1.13% o.m ! .147.
,. l:',.,u
! .... ,1)7'1,
.. pt
w ..),:.
Z,2S7.
q,m
lt.i.;: 6.084
11.m 1.167. 6.
46.84% :4.8ot 2!.774
18.53%
1
).52i:
5
,1,.-J.:
24.53% o.m 9.!37.
:). 76X
9.39% t). iS% 1.m
s.m
.).m
!!.!OX 7.:sx
"ioo\Jt"U . \NS Afk.IIAS esfiMAHs-
see. te.:'r(t;
- 698 -
TABLE 12.4 -.AVERAGE IMPORT PENETRATION RATES
ESA R-59
Category
0!0
031
033
050
071
071
t)75
095
097
098
oq9
110
135
136
m
151
!53
!55
!57
170
19!)
210
230
250
270
:90
310
350
370




471
m
490
510
descr1ption
Agricui t'Jral. and fishery products
Coal ana coal briquettes
Lign1te (brawn coall and liqnit! brLouettes
Products of cok1ng
CnJae petrola!ta
Refined petroleu products
Natural gas
Water (collection, purification, distribution)
Electric power
"anufactured gases
Stea1, hot water, comores;ed a1r
fuels
iron ore ind ECSC iron and steel oroducts
Non-ECSC iron and steel
Non-ferrous .etal ores; non-ferrous aet.ll.;
Ce1ent, liae, plaster
Glass
Earthenware and cera1ic products
Other tinerals and dertved arooucts (non-etalltc
Cheaical products
oroaucts
Agricultural and industrial aachinery
Office aachines, etc.
Electrical goods
"otor vehicles and engines
transport
Heat and teat products
Milk and diary products
Other food aroducts
Beverages
Tobacco products
Textiles and cloth1ng
Leathers, leather 1nd skin goods, footwear
Ti;ber and wooden furniture
Pulp, oaper, bJard
Paper QOOds, products of printing
Rubber and products
Other ;anufacturing products
Building and civil eng1nnering
Recovery and repair serv1ces
Wholesale and retail tnde
Loaginq and catering servtc!s
RailMay transport servtces
Road transoort serv1ces
Inland waterways services
and coastal transoort serv1ces
Air transoort servtces
Auxiliary transport serv1ces
Co11un 1ca tions
Credit and
Bus1ness services prov1ded to =nter?rises
of 10ods
serv1ces of ind
serv1ces Jf heiith
serv1ces n.e.c.
General pJblic serVl:es
serv1ces of =ducat1on and
services of heilth
930 services 1.e.c.
3E!.5IU" FRANCE ITALY
0.45 ').2b J. 19
1),31
1) ,:':! tl.ilb tl,t)l.!
0.56 0.36 1)' 0.20
o.a? 0.41 t}.:)2 0.4:
0.53 0.28 0.21 0.25
0.50 o. 18 0.11 l.26
0.10 0.47 0.25
O.lS 0.21 1),35 ) .1!)
o.7e o.:a t).!b
<),:9
0. !B
1), 14 1),15
1),:4
0' :.; us 0.14
.).15 0.1!
1),!)'1
O.bb l.:a 1), :1 .).07
.).:0
'>'
0.27
O.H
'),:1
0.33
r).22
,).:q
0.41
<).30
:). q
0.:4
0.37
-------------------------------------------------------------------------------------------------------
1Z7
- 699 -
178
TABLE 12.5 - PUBLIC/PRIVATE SECTOR INTERMEDIATE CONSUMPTION
ESA R-59
Category
1escnotlon
:)10 'i;:hen
,(i Co1i 1110 (IJ!l
1:: coail ana iignite
!S: lJf :J:.lnq
1):" 1
'f:: 1
i75
(ciJilectlon,
iF Ei 2ctnc
l9S i gases
oqq hot water, como res sed au
11!) Nuciear fuels
135 !rcn ore and ECSC iron and Heel products
I :6 lron ind orMucts
1:1 'len-ferrous ,e!l
!SI Ce!!!ent, qu, plaster
1!l3 5lass
155 Earthennre ind cen11c
157 Other unerais ind derived products (non-metalllcl
170 Che11cal oroducts
190 products
JnC
:<:.l Qflice uch1nes, etc.
goods
270 vehicles an!! eng1nes
290 Other transport eoulDient
310 l!e:t and lleat products
IIW. diary products
350 Other food products
370 9evenges
-:10 Tobacco
410 Textiles 1nd clothing
J30 Leathers, leather and skin goods, footwear
450 T iaoer iM liOoden f1rn 1
471 Pulp, paoer, board
473 Paper gooos, products of pnnting
490 Rubber and plastics products
510 Other linufactunng products
530 Bu1ld1ng and ciV11 eng1nnenng
SSO llecovery and repair services
570 Wholesale :md retail trade
590 Lodging and catenng ;ervices
bll 1\ul"ay transoort serv1ces
Roid ;ernces
617 !n:>nd water..,avs
6:1 and tnnscort ;ervw:!s
633 transoort serv1ces
A1xliur1 ;erHc2s
7(1 Ccmmun1cations
1n;unnce
7!0 ;'.L:ilness orGvload
7:\ of LMovao!e goo1s
1':: :erviC2S of l.nd
r,d J;

35(
1
:
4
"esear:"'
Total P1ollc
Purcnas1ng
i418!
:at
19:
:oQ:
:753
1620
87:i
1518
241
1154
1169
746


227
559
1018
12352
am
lOCO!
6702
18027
65:5

2225
1194
2474
809
38
2b3:
486
2680
1700
9176
2744
1771
102154
2559
mo
sm
3461
ms
4q
7053
28t.4
Total Gross Estluted Pnvate
Outout Purchasing
200384
24412
78i}9



!1521
72578
13173
745
5737

31215
69529

1627'?
21475
44649
219685
148444
52240
15871S
170891
5!lb59
77168
41183
151491
43962
26309
153965
32745
810b7
42469
77554
68697
29053
330255
som
386971
llt966
21192
75182
b3b

205:1

55190
mo:
7
16961)0
'7""'..,0C:
l' .J .. 'JJ
S7';QO

..........
""JL J..;
::::
14841


10
76!6
i01311)
143SZ
9901
63841
11655
504


30467
69!64
10500
16052
2091o
43631
207333
mm
i726q1
45478
140688
164356
21037
74943
39989
149017
43153
26271
151332
32259
78387
40769

65953
27282
227901
54440
377401
111674
17731
70524
597
29811


48137
t48'm
1518:4
16i765
6582
- 700 -
179
TABLE 12.6 - IMPLICIT PRIVATE SECTOR IMPORT PENETRATION
R-S9


?!0 4FlCJltunl, fishery
)31 CJal ano :oal bnquettes
Liqn1te (broKn coJll 111d
of
:7! Crude petroieu11
)73 Refined oetroleua ar!lducts
tl7S 'latural gas
095 Rater !collection,
097 Electric oo11er
099 gases
099 Steal, hot Mater, ur
110 fuels
iron are ind ECSC 1ron ind aroducts
iron and steel products
137 Non-ferrous aetal ores; non-ferrous tetals
151 Cuent, lue, piaster
15Z 9lass
155 Earthen11are ceraaic products
157 Other unenls and denved prooucts (non-:tetillic
!70 Chemical products
!9
1
)
210 and industr1al
Office tachines, etc.
Electr1cal goods
270 Motor vehtcles 1nd eng1nes
290 Other transoort eautpaent
ind 1eat oroducts
:30 and diary products
Other food products
3'0 'everages
:qo TJbacco products
410 Text1les and c!oth1ng
430 Laathers, 1nd ;kin good;, ;ot:fear
iimber 1nd Kooden furn1ture
PJlo, paoer.
473 Paper goods, oroducts of printing
and alast1cs
S!O Other unuhctunnq arJducts
530 Building and civil eng1nner1ng
550 Recovery 1nd epair serv1ces
Aholesale ana retail trade
sqo Lodq1ng 1nd catering ;ervices
6!1 transoort services
61 tnnsaJrt
6'7 !nl1nd waterwavs serv1ces
!1.11 Han ti:1e and coastal transport ;er'IIC!S
!1:3 transoort serv1ces
AJxiliary transport serVlces
670 Ccmunicat1ans
i90 it illd 1nsunnce
710 3!slness serices orov1ded
1:0 joods
750 ;erv1c2s of gducat1cn 1nd resaarch
;erv1ces health
iQO
SlO

oubllc
serv1ces of and "!search
serv1ces o'

a.:Bl
".b:t
57.21%
as.m 42.59%
ss.nx :a.m

SO.OO% 80.007.
45.74% .14%
79 ,1)57. 28 . 1SX
17. i\14
111.m
37.'m
26.727.
"'I
'J.
19.S4't ...
:

l. !'_If
'J I,.., .. q .:?87.
'"
l'la:a..J 'o
14.87'L ZLm :a.
-s: 1
,q,m

22.584
"'""'''
O.Jit
i1.71: 27.m :4.1 )7.
30.00% 30.001
!O.ioi:
n.m 15.727. 41.5!1.
14 . :o ... 3%
1a.Z
11
Y. i Q.
11.047.

.::7. 1-'.
21. 7,7:7.
:? ':
Sov.-uit: C&4.kvlq-f.io"'
sec te,ct
- 701 -
180
TABLE 12.7 - CHANGE IN PUBLIC SECTOR "IMPORT PENETRATION AFTER "1992"
ESA R-59
Category
:ategarv cestrlption
010 and fisher'l Qro1ucts
BELSIU" FRANCE SER"ANY UK
0:1 Jt Coal and briouettes 0.00% 90.00% 0.00% IQ,;)V%
033 Lign1te !brJKn coali 1nd lignite briouettes
Products of coking
Oil Crude
073 Refined
075
095 Water (coliectlon, purification, distribution)
)97 Electric power
098 "anufactured gases
099 Steu, hot water, co pressed air
110 fuels
135 Iron ore 1nd ECSC iron and steel ?roducts
136 iron and steel products
Non-+errous 1etal Jres; non-ferrous 11etals
151 Ce1ent, li1e, plaster
!53 Glass
155 Earthenware and cera1ic products
157 Other 111nerals 1nd derived products (non-aetallic
170 Che11ical products
! 90 i1etil products
210 ana 1naustr1al aach1nerv
230 Office 1achines, etc.
:so Electrlcal goods
270 vehicles and !ngines
290 Other transport equ1p1ent
310 Meat 1nd aeat oroducts
Milk and 1iarv products
350 food products
3i0 Beverages
390 iobacco products
410 Textiles and clothing
4:0 leathers, leather 1nd skin goods, footwear
Ti1ber and wooden furniture
Hi Pula, paoer, board
473 Paoer goods, oroducts of print1ng
;qo Rubber and oroducts
510 Other tanufacturing products
-*Building 1nd c1v1l eng1nnenng 11orks
550 and repair services
570 !nd retail tr!de
50 lodging !nd :ater1ng services
.HI tnnsoort
611 transnort ;erv1ces

. 1131 and coastal transport ser1tces
trinsoort ;arv1ces
Auulur'l transoart serVlces
Co!IIJUnlotions
b90 and 1nsurance
71:) * ilusu.ess ;en1ces to er.terJrues
1:0 1i
i"::O !'larlet sernces '' aduotlon and
;erVLcas o? th
-qo servlces
310 serv1ces
sernc2s and
o;erVlces lt health
Non-urlet H!r'tlCes
24.11l 5.48% 9.74%
16.77: t.m J.o:;x
29.72% 1.m 7
0.007. 9.34% 17.:5%
29.96% 6.16% 11.m
0.00% 3.m s.m
47.40% 69.98% 33.1b%
:3.:tz 4.m 17.15%
40.24% s.m
ts.m :.m 6.95%
17.94%
.. .., ..
) ..... 8.90%
IUS% z.m: s ..
35.40% 5.52% 10.75%
l!),t)l)%
!0.00% 10.00%
j0,83% 16.12%
9.407. 3.331
20.507.
..,.._ ''""'
i.-'a,.!t
47.11% .l2X
27.08% 27.iSi.
25.307. 27 .o)%
5S.ZO%
9.64%
14.m
t4.:ox 24.ao%
!4.Z5X 15.1()%
a. 11. :at.
7.:u 78X
11),1)!)7. !1),1)1)7.
SoVt"C 12. 3 /12. 6
fli'tL-
----------------------------------------------------------------------------------------------------
- 702 -
181
* the data on public and private sector intermediate consumption
from ESA input-output tables
* the calculated implicit private sector import penetration
* the calculated and assumed changes in import penetration used
in the model.
12.5 Base Case Calculations
Tables 12.8, 12.9 and 12.10 show-the results of the calculation of
the three components of the potential saving in public expenditure.
They are summarised in Table 12.1 1.
- 703 -
TABLE 12.8 - BASE CASE ESTIMATE OF THE STATIC TRADE EFFECT
(billion Ecus)
182
:sA Cateaorv descriot1on 3elglUI Franc! aeranv Italy Un1ted Total

Hl tnd orodu:ts
So a I and coal briauet!es
Liqn1 ( :oall .1nd l ign 1 te bnouettes
050 Proaucts af cok1ng
1)7[ Cr11ae petroltllll
)7) Refined oroducts
.m Natunl gas
095 (collection, purification, distribution)
El2ctrtc
.)98 Manufactured gases
l)qQ hot water, co1pressed 1ir
110 Nuclear fuels
Iron ore ECSC iran and steel oroducts
Non-ECSC iran and steel products
tetal ores; non-ferrous lttils
!51 Cement, ii11e, plaster
[53 :jldSS
Earthenwar! and cera111C products
::7 IJther unenls .:md derived (non-1etil!
170 Chemtcal pro1ucts
:90 oroducts
210 Agr1cultural and industrial
z:o Office tachines, etc.
:so Electr1ca1 goads
ZiO Motor vehtcles enqines
Qther trinsoort eautoient
3!0 Meat and 11eat products
130 Mil' and diarv products
i50 ather food products
170 9everaoes
products
410 Text1les and clothina
Leathers, leather :tnd sktn }Oods, footlteir
450 Ttaber and wooden
471 Pula, paper, board
47: Paper goods, products of print1nq
l90 Rubber tnd olastics products
510 Other anufacturina products
530 8utlding and ClVtl-enginnering
550 Recovery and reoa1r serv1ces
570 and reta1l
590 Lodo1ng and catering serv1ces
Ra1lwav transoort servtces
6!3 transport serv1ces
lll Inland waterways
b31 and coastal transport servtces
Atr transport servtces
650 Auuliarv transport services
l70 Collltuntcahons
6q0 Credit and insurance
7
!0 3uslness services proVlded to !nteronses
'30 Rentino of i11ovable aoods
of eaucat1on tnd rl!setrch
770 M.arket services of
790 ;ervices n.e.c.
810 aenertl services
850 sernces Jf and resetrch
aqo services of health
serv1ces n.e.c.
Gnnd Total
Source: WS Atkins calculations
1)
0
!)
0
)
0
!)
0
0
0
!)
0
0
0
0
f)
0
0
0
10
9
10
I)
'I
o.
i)
!b:
I)
0
!)
0
I)
110
6
2
1)
0
4
2
51
0
:)
I)
I)
0
I)

0
I)
I)
1)
I)
I)
I)
0
I)
I)
I)
)
<)
0
1)
0
I)
t)
1)
I)
0
1)
0
0
0
I)
0
I)
1)
<)
I)
I)
I)
l
11
7
42
!I)
lj
I)
1)
0
!)
I)
4
0
1
2
I)
1
2
269
I)
I)
0
0
t)
I)
0
I)
0
I)
0
72
<)
1)
I)
!)
1)
0
0
1)
,., ..
""J
r)
1816
I)
0
0
I)
I)
I)
1)
0
0
<)
I)
0
0
0
I)
0
I)
550
l
J
17
14
91
5
:96
1)
!)
I)
0
0
0
2
5
14
1)
5
i
236
0
I)
0
r)'
1)
I)
0
I)
0
)
)
72
0
1)
i)
0
0
I)
I)
'!
1)
0
0
0
I)
0
0
I)
I)
0
Q
0
I)
0
I)
1)
1)
0
0
0
1
17
142

2b

0
I)
I)
0
0
18
2
0
I)
I)
7
.,
..
233
0
I)
t)
0
0
I)
1)
0
0
0
0
34
0
I)
0
0
0
0
0
0
King dot
I)
207
!)
()
I)
0
I)
I)
I)
0
0
0
0
0
I)
0
I)
0
0

1

71
104
;3
!93
0
I)
1)
0
0
2
2
0
0
0
4
10
234
0
1)
?
I)
0
0
?
0
0
I)
0
47
)
1)
I)
0
0
I)
)
)
!
0
2022
')
0
0
0
I)
0
0
0
0
0
I)
0
I)
0
I)
;)
,)
1010
15
116
m
402 '
7'?
...
...
I)
1)
1)
0
0
134
!2
9
16
0
zo
19
!)24
i)
I)
0
1)
0
)
0
I)
,)
I)
1)
224
0
1)
0
')
1)
1)
I)
(;
- 704 -
TABLE 12.9 - BASE CASE ESTIMATE OF THE COMPETITION EFFECT
(billion Ecus)
183
--------------------------------------------------------------------------------------------------------
ESA Category description
Category
Belgiu Fnnce Gerunv I tal 'f Un1 ted Total
( ingOJI
---------------------------------------------------------------------------------------------------------
010 Agricul forestrt .1nd iisher'f orJduct; 0
) <) I) 1) I)
.m Coal and coal
t) )
0
t)
0
)
Lignite (brown coall ind lignite bnauettes 0 0
I)
0
t)
050 Products of cokina
1) !) t) t) t) )
071 Crude petrJleu Q
I} t} )
0
073 Refined petroleua products 0
)
0
')
075 Natural gas
1) 1) i} I)
0
)
!collection, purification, d1stnbutlonl 0
,j i) <)
0
09' Electric power
1) I)
0
I) tl 1)
1)98 "anufactured gases 0
I) .) ) t) 1)
099 Steaa, hot ater, coapressed a1r
1) 1) 1) 1) i)
0
110 Nuclear fuels
I)
0 0
1) 1)
0
135 Iron ore and ECSC iron 1nd steel products
1)
0
1)
0
1)
0
136 Non-ECSC iron and steel products 0 0 0 0
I) )
etal ore,; non-ferrous tetals 0
i) I) !) r) !)
151 Ceeent, lae, plast!!r 0 0 0 0 0
I)
IS: Gl.iSS 0 0
I) :) 1) 1)
155 Earthenware and cera1ic products 0 0
t) 1)
:J 0
157 Other 1inenls 1nd denved oroducts !non-1et1ll
1} 1} 1}
'} 0
,)
170 Chesical products 0 0 0
1)
0 0
!90 oroducts
I) I) I)
0
I) 1)
210 and industrial 1ach1nery 0 0 0 0 0
t)
Otfice
1) ')
1\
\)
'
I
.,
251) Electrical -oods o2 2bil 301 1'" 146
270 Motor vehlc1es 1nd
hi
I)
0
I) t)
0
1)
290 Other transport eau1p1ent 144 0
4iq
1:0 1051
:no l'!ut and aut aroducts
1) I) !)
0
t) 1)
1:0 "ilk 1nd diary products 9 0 0 0 Q 0
150 Other food oroducts
!)
0
I) !) I) I)
370 Beverages 0 0 0 0
1)
?
Tobacco products 0
I)
0
I} 1) t)
410 Text1les and clothina 0 0 0 0 0
430 Leathers, leather ind >kin goods, faotllear 0
I)
0
1) I)
450 Ti1ber and ooden furn1ture I) ()
I) ')
0
1)
471 Pulp, paper, board 0
1) I) I} !) t)
Paoer goods, products of printing 0
I) t) 1) )
0
490 Rubber and pllstics oroducts
I)
0
I)
0
t)
!
510 Other tanufacturing products I)
0
I)
0 0
.)
S30 Building and ClVll enginnering 0
1) I)'
0
) 1)
s:o Recover\ and repair serv1ces
I) I) 1)
0 0 0
570 Wholesa e and trade 0
I)
0
1) ) 1)
590 and cater1ng services
r)
0
1)
0 0 0
bll Rai way transport services
I} i) I} I) I}
)
bl3 Road transport serv1ces )
0 0 0 0 0
ll7 In land waterwavs services 1) I} 1) t) 1} 1)
b31 "aritie and coastal trsnsoort serv1ces 0 0
() \) I) t)
1133 A1r tnnsport serv1ces
0
t)
')
1) 1) I)
650 Auxiliary transport serv1ces 1)
9
1) )
,) )
670 CotiUnlcations
0
i) 1) 1)
) ')
690 Credit and 1nsurance
0 0
1) 1) :) )
710 8USlness serVlCeS to
1) I)
0
1) t) )
Rent1ng of im1ovab e 1oods ? 0
)
0 0
I)
iS!) services of ana I)
0
1)
0
1) )
770 services ot health
0
I)
0 0 )
,)
i90 "arxet serv1ces n.e.c .. Q I)
,,
1) ,) ,)
'I
910 Beneril public serv1ces
0 0
1) 1) ) <)
.350 services of eduCltiJn 1nd
1)
0
1) ,) 1) )
390 serv1ces of health ) r) )
0
')
Hon-tarket serv1ces n.e.c.
t) ,) :) !) ) )
---------------------------------------------------------------------------------------------------------
Sra11d Total
2Jb
77Q
..

---------------------------------------------------------------------------------------------------------
Source: ws Atkins calculations
- 705 -
TABLE 12.10- BASE CASE ESTIMATE OF THE RESTRUCTURING EFFECT
(billion Ecus)
SA

0!0 3nd f1shery
1nd co1!
0:3 Lignite co3ll and lign1te briquettes
COklnO
071 Crude oetroleu;

petroleu11 oroducts
)7'5 Natura I a as
QqS purificat1an, d1stributicnl
Qq7 Electr1c power
1
W8 oases
Steas, hot comoressed air
11) Nuclear fuels
135 Iron ore and ECSC 1ron 1nd steel products
1 :b 'lon-ECSC iron 1nd s tee 1 orod1cts
!37 Non-ferrous 1etal ores; non-ferrous
!51 lue, piaster
!53 Glass
155 E1rthen"are
!57 11nerals 3nd der1ved oroducts lnon-tetall
170 Che111cal prJducts
190 Metal products
210 and 1ndustr1al tach1nery
:30 Offic2 11ach1nes,
:so Electr1cal 1oads
:70 "otor veh1c.es 3nd eng1nes
:'lO
31) 11eat and .11eat oroaucts
:3v and d1arv products
Other food products
:70 Bevenqes
390 Tobacco oroducts
410 Text1les and cloth1ng
430 Leathers, leather and sk1n goods,
450 Titber and furn1ture
471 Pulp, board
Pioer goods, orcducts of print1nq
4q0 Pubber 1nd plastics products
Other
530 Building and c1vil eng1nner1ng works
1nd reoa1r
570 Wholesale and retall trade
590 and :ataring sernces
611 Rulwav transport services
)13 Road services
,17 Inland waterways serv1ces
)31 1nd coastal transport services
633 serv1ces
:5) Auxiliary tnnsoart :ervtces
Comun1ntions
.;90 t and 1nsunnce
710 Bus1ness serv1ces crov1aed to enterprtses
710 qentin?
750 Market services of educ1t1on and research
77? of health
7q0 n.e.c.
310 Genen 1 pub 1 ic ser1 ices
'lon-11arket services of education 1nd research
390 serVLces of ne1lth
130 Non-tarket serv1ces n.e.c.
Total
Source: WS Atkins' calculations
qESTRUCTlJR !NG
FtiCTOR
ox
0%
07.
0%
07.
0%
41.
07.
m
ox
ox
07.
ox
O't
07.
0%
BEL6IUft FRANCE GER"ANY ITALY
0
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179
9

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- 706 -
TABLE 12.11- SUMMARY OF BASE CASE ESTIMATES OF TOTAL SAVINGS
(billions of Ecus 1984)
Belgium France Germany Italy UK
185
Total
EUR5
Static Trade Effect 0.5 0.4 3. l 1.2 1.4 6.6
Competition Effect 0.2 0.3 0.8 0.4 0.3 1.9
Restructuring Effect 0.5 1.4 l.O 0.9 2. l 6.0
Total Savings l.l 2. l 4.9 2.5 3.8 14.5
GOP 1984 96.9 623.3 783.8 521.7 540.3 2556
Savings as % of GOP l.l 0.3 0.6 0.5 0.7 0.6
Source:
12.6
WS Atkins model
Sensitivity Analysis
A series of sensitivity analyses have been carried out to test the
robustness of the base case hypotheses. The critical alternative
cases examined are:
* Case I volume of contracts: savings only apply to contract
purchases which are covered by EC legislation. These
are estimated to represent 80 percent of total
purchasing
* Case II import penetration: supply side constraints restrict
the change in import penetration to 50 percent of the
Base Case estimates
* Case III trading costs: risk premium and trading costs are
negligible in the new internal market conditions
* Case IV price savings: variation of ~ 20 percent
* Case V restructuring effects: variation o ~ 30 percent
- 707 -
186
* Case VI competition effect: variation - 50 percent
The results are shown in Table 12.12 and the overall findings
summarised in Table 12.13.
TABLE 12.12- SENSITIVITY ANALYSIS
(billion Ecus)
Base case
Base case excluding coal
I: 80% contracts
II: 50% import penetration
III: No trading cost
IV: Price savings ~ 20%
V: Restructuring effect + 33%
VI: Competition effect - 50%
Static
Trade
Effect
6.6
4.6
5.3
3.3
7.3
5.3-7.9
6.6
6.6
a m p ~
Effect
1.9
1.9
2.2
2.7
2.0
1.9
1.9
1 0
Restruct I
Effect
1
6.0
6.0
6.0
6.0
6.0
6.0
4.0-8.0
6.0
Total
14.5
12.5
13.5
12.0
15.3
13.2-15.8
12.5-16.5
13.6
Notes: The Base Case static trade effect includes savings of:
Coal 2.0 bn ecu
Pharmaceuticals 1.0 bn ecu
Equip goods 2.1 bn ecu
Consumer goods 0.2 bn ecu
Construction 1.0 bn ecu
Services 0.2 bn ecu
n bn ecu
Competition and restructuring effects are entirely in equipment
goods ('electrical equipment' and 'other transport equipment')
- 708 -
Component
TABLE 12.13- SUMMARY QF POTENTIAL SAVINGS
(Billion Ecus 1984 - 5 countries)
Value % GOP
187
% of total
(billion ecus) public purchasing
Static trade effect * 3 - 8 0.1 - 0.3 1 - 2
Competition effect
Restructuring effect
12.7 Caveats
1 - 3
4 - 8
8 - 19
0.04
0. 15
0.3
- 0.1 0.3 - 1
- 0.3 - 2
- 0.7 2 - 5
It should be recalled that the estimates include the savings in
public expenditure (matched by production cost savings) resulting
from the complete opening up of the European markets by
implementation of the White Paper proposals. It does not, however,
include:
* effects on private sector purchases of products whose price is
reduced by the restructuring or competition effects. This is
relatively small since these effects only apply to sectors
where public sector purchasing dominates
* long term effects on the pace of innovation and economic
growth as a result of more effective use of R&D. The present
estimates measure a potential saving in R&D to achieve the
same product strategy. This could be the greatest benefit of
all in the long run, and the one thing above all that keeps
Europes major industries competitive.
Within the limited definition of savings in public expenditure,
however, it should be noted that:
709 -
188
* the calculations of the static price effect are a theoretical
upper limit to the potential expenditure savings for each of
the products analysed, because:
- part of the observed price differences may be due to
quality and specification differences
- any errors in prices quoted will tend to exaggerate price
differences
initial price differences do not necessarily measure
differences in life cycle value for money, so initial price
savings may lead to higher maintenance, operating or
replacement costs later on
* the calculated savings are the potential result, across all
goods and services purchased by the public sector of an open
internal market and require all barriers to be removed.
Merely oper.ing up public purchasing procedures wi11 not in
itself allow these savings to be achieved. The price
differences exist in most cases because of other barriers to
trade: eg.
- cartels
- market share agreements
- exclusive dealerships
- trade formalities (eg. on cars and high technology goods)
- national standards
- product approval procedures
* changing public purchasing regulations, even if all other
barriers are removed, will not induce totally free trade:
- suppliers, particularly SMEs, often deliberately choose to
supply a local, regional or national market and may not
respond to international calls for tender
- 710 -
189
- suppliers dislike open bidding procedures and often
consider that the probabi 1 ity of success does not justify
the cost of bidding - particularly where there are language
problems
- there are good reasons, other than price, for purchasing
locally: after sales service, security of supply, language
* conversely, some of the benefits of wider public procurement
will be achieved anyway, even if there is no change in the
internal market conditions because technology changes are
forcing firms in some key industries to adopt Europe-wide, and
indeed worldwide, production and marketing strategies.
12.8 Unquantified Effects
There are also other unquantified effects, which include:
* employment effects of plant closures and rationalisation. Of
the case studies_, this principally effects coal (which is a
special case) and possibly boilers and turbine generators.
The other products are in growing markets and do not have
significant excess capacity, so employment should continue to
grow. Moreover, failure to implement the internal market
strategy will lead to some industries becoming uncompetitive,
with the risk off widescale loss of employment.
* regional disparities. There are likely to be a small number
of surviving firms in boilers, turbine generators, locomotives
and computers. The stronger firms are those in the four major
countries France, Germany, UK and Italy. Labour cost
differences may induce the surviving firms to manufacture in
the newer Member States, but the hi story of customs unions
suggests this is not usually sufficient to offset the
concentration effects
711 -
190
* monopoly effects. The number of firms will reduce, and in the
case of power generation equipment, locomotives and mainframe
computers there may be only one producer based in each of the
main countries. But, if there is a truly open market, there
will be real competition between European firms. At present
there is no intra-European competition, and domestic
competition is severely limited by tacit agreements between
firms, and by attempts by governments to share out contracts
in order to keep more than one firm in business
* external trade effects. In power generation equipment and
locomotives, and possibly also in teleconununications, some
firms commented that protected national markets, in which they
can cover their overheads from domestic sales, permit firms to
compete in export markets by selling below average cost. This
is what Japanese firms seem to be ab 1 e to do, and European
firms follow suit. If domestic prices are driven down by open
competition, firms fear that Japanese and Far Eastern firms
will enter the European market, but European firms will have
to try to sell abroad at full cost or close down capacity
European firms will become more efficient, but there may be a
short-term adverse effect on the extern a 1 trade ba 1 ance in
these case study products. The consultant believes that the
long term viability of key industries like power generation
equipment, railway equipment, aerospace,_ computers and
telecommunications depend on the development of a large
competitive European market.
713 -
191
A P P E N 0 I X E S
715 -
APPENDIX I
SPECIFICATIONS OF
11
PRICE EFFECT LIST" SAMPLE PRODUCTS
Product: PHARMACEUTICALS - DIGOXIN
Product Specification:
Order Quantity:
Delivery Instructions:
62.5 mg tablet
200 tablets
to main hospital complex
Product: PHARMACEUTICALS - PARACETAMOL
Product Specification: 500 mg tablet
Order Quantity: 10 l'JOO tab i ets
Delivery Instructions: to main hospital complex
Product: POWER CONDUCTOR
Product Specification:
132 kV Aluminium Cored, steel reinforced
overhead line - Lynx conductor
Order Quantity: 10 km
Delivery Instructions: to nearest main road site
Product: STREET LIGHTING
Product Specification:
1. Lighting: 25,000 lumens
2. Power: 200-250W
3. Lantern Size: 610-743 mm long
400 rrm wide
320 mm deep
4. Weight: 5-6 kilo gross
5. Including lamp, canopy and bow
6. Without control gear and capacitor
7. High pressure sodium lamp
192
- 716 -
Appendix I (contd)
Order Quantity:
Delivery Instructions:
Product: FLUORESCENT TUBE
Product Specification:
1. 80 w
2. 5
1
/164 em long
Order Quantity:
193
200 off
to central depot
500 off
Delivery Instructions: to central office supplies depot
Product: SCHOOL DESK
. Product Specification:
1. Single
2. Metal frame, laminated top
3. No storage _
4. Size - 71 em high
- 60 em wide
- 60 em deep
Order Quantity:
Delivery Instructions:
Product: OFFICE DESK
Product Specification:
100 off
to central depot
1. Stratified table (laminated plastic)
2. One side, box with 2 drawers; other side, box with
3 drawers, all lockable
3. Steel modesty board
4. Painted square tubular metal legs/feet
5. Size: 0.75 m high
1.56 x 0.78 m top
Order Quantity: 100 off
Delivery Instructions: to central office supplies depot
717 -
Appendix I (cont'd)
Product: FILING CABINET
Product Specification:
1. 4 drawers and file supports
2. Size - 135 em high
45 em wide
62 em deep
Order Quantity:
Delivery Instructions:
50 off
to central office supplies depot
Product: UNIFORM (eg. Police/Ambulance/Postman)
Product Specification:
1. Jacket - single breasted with 2 chrome buttons
2. Trousers - 2 pairs with zip fly front, self supporting
3. Cloth - polyester/cotton mix (65% to 35%)
210 gm/m
2
cloth with miraclean finish
- to fit man 1.75 - 1.78 min height 4. Size
- jacket : 103 em chest, 89 em waist
- trousers : 89 em waist, 82.5 em leg
Order Quantity: 100 suits
Delivery Instructions: to central depot
Product: PHOTOCOPY PAPER
Product Specification:
1. Size - A4
2. Weight - 80g/m
2
3. Brand - Xerox
Order Quantity: 100 reams
Delivery Instructions: to central office supplies depot
Product: CEMENT
Product Specification: Portland
Order Quantity: 10 tonne bulk
Delivery Instructions: to centre of Capital city
194
- 718 -
195
Appendix I (contd)
Product: OPEL ASCONA/VAUXHALL CAVALIER 1600
Product Specification:
1. Standard model
2. 1.6 Hatchback; 4 speed manual transmission
3. Engine: 1598 cc petrol/gasoline
90 PS(DIN) @ 5800 rpm max. power
93 lb ft (126 Nm) @ 3800-4200 rpm max. torque
Varajet twin barrel carburettor, manual choke
9.2:1 compression ratio
4. Sizes: Wheelbase - 2577 mm
Load capacities- 1.21 m
3
seat down (VDA method)
Cargo spage- 1.5 m max. length with rear seat down
1.2 m max. width rear floor
0.825 m max. cargo height
Order Quantity: 100 off
Delivery Instructions: to central depot
Product: FIAT DUCATO 1.3 TON VAN
Product Specification:
1. Gross Vehicle weight: 2800 kgs
2. Payload: 1385 kgs
3. Engine: 2.0 litre petrol, 78 bhp, 4 cylinder, in line
4. Torque: 113.2 lb.ft. (154.0 Nm) @ 2500 rpm
5. Transmission: 5 speed manual gearbox, clutch 228.6mm diameter
6. Wheel base: 2923 mm
7. Body volume: 6.5 m
3
8. Floor area: 4.46 m
2
9. Not high roof version
10. ~ e s dual circuit, disc on front, drums on rear
11. Steering: rack and pinion
Order Quantity: 30 off
Delivery Instructions: to central depot
719 -
19
Appendix I (contd)
Product: VW TRANSPORTER DELIVERY VAN
Product Specification:
l. Gross vehicle weight: 2390 kgs
2. Payload:
3. Engine: 1.9 litre petrol, 78 bhp, 4 cylinder, in line
4. Torque: 103.9 lb.ft. (141 Nm) @ 2600 rpm
5. Transmission: 4 speed manual gearbox, clutch 228 mm diameter
6. Wheel base: 2460 mm
7. Body volume: 5.7 m
3
8. Not high roof version
Order Quantity: 30 off
Delivery Instructions: to central depot
Product: CARDIAC MONITOR
Product Specification:
l. HELLIGE SMS 151 or similar
Order Quantity: 1 off
Delivery. Instructions: to main hospital complex
Product: FLUOROSCOPIC SCREENING UNIT (X-RAY MACHINE)
Product Specification:
1. SIEMENS SIRESKOP 4 with undercouched tube
and 90"/60" tilting table
2. Without generator, tubes, cables, screen
3. With explorator
Order Quantity: 1 off
Delivery Instructions: to main hospital complex
Product: TRANSFORMER
Product Specification:
l. Output capacity 100 kVA
2. H.V. Line volts 20 kV
3. L.V. Line/Phase volt 400/231 V
4. Oil (no askarel) filled sealed type
- 720 -
1S7
Appendix I (contd)
5. Weight with oil
6. Three phase 50 Hz
7. Terminals:
8. Tappings:
3150 kilos
neutral earth
external H.V. and L.V. bushings
by external off load switch + 2 ~ , 5%
on primary volts
9.
10.
11.
12.
13.
14.
Losses: load-loss 11.8 kW
: no load loss 1.8 kW
HV/LV winding connections 41 DYll
Delta/Star
Norms IEC 76
Impulse voltages: 75 kV peak, withstand using 1.2/50 wave,
positive and negative polarities
Order Quantity: 20 off
Delivery Instructions: to site
Product: RAILWAY GOODS WAGON
Product Specification:
1. Flat bogie, standard model
2. 4 axles
3. Carrying capacity 54 tonnes
4. Tare weight: -13.4 tonnes
5. Size : 19.9 m long
2.974 m wide
6. Air and screw brakes
Order Quantity:
Delivery Instructions:
Product: TELEPHONE SET
Product Specification:
1. Standard digital model
2. Without accessories
3. Table telephone
Order Quantity:
Delivery Instructions:
10 off
to central railway depot
a) 100 off (eg. to a government office)
b) 10,000 off (to a PTT)
to central office supplies depot
721 -
APPENDIX II
CALCULATION OF TYPICAL SAVINGS THRESHOLDS
AND POTENTIAL SAVINGS FACTORS
198
11.1 Savings Thresholds
The savings threshold is the cost of initiating trade with an
overseas supplier, expressed as a percentage of the present price
from home suppliers. It represents the saving that has to be
offered by a foreign supplier to make trade worthwhile.
The savings threshold is the sum of:
* transport and insurance costs
* trading and procurement costs (advertising, local
representation, bid preparation or selling costs by the
supplier; and advertising, bid evaluation, quality assurance
and inspection or testing costs by the purchaser)
* premium for trading risks (supply interruption, supplier
default)
* the cost of foreign exchange cover
* costs resulting from the purchase of products with different
quality or specification, such as higher maintenance costs,
lower performance, and adaptation costs.
The Tables II.l (a) to (e) show, for each pair of trading countries,
a calculation of these components of the saving threshold based on
reasonable assumptions about typical contract sizes, and trading
costs. The savings threshold is in many cases a very significant
- 722 -
1'9"9
Appendix II (cont'd}
portion of the total product cost, and is very sensitive to
assumptions about contract size, and the location of supplier and
purchaser. For large contracts between parties close to each other
(ie. in border areas} the threshold would be very low. For small
contracts between remote parties (ie. Scotland and the Mezzogiorno)
it would be prohibitive. For any product, therefore, there may be
potentia 1 savings on some contracts, and none on others. The
estimates in this report are for a typical contract.
The assumptions made in Table II.l are described below:
* Transport costs
Figure II.l shows a simplified model of typical transport
costs per tonne-km or per m
3
-km for consignments between two
European cities. This is representative of journeys between
major industrial centres in Europe. The data is from current
air freight rates and a recent Atkins study on road freight
costs.
In Table II.l the typical weight (or volume} of each
consignment has been estimated (column 5). The typical
transport cost per tonne(m
3
)-km is estimatedfrom Figure II.l
(column 6}. The transport margin is then calculated as:
(Transp%} = (wt or vol) * (transp/tn.km) * (distance) I (unit
cost)
Unit cost is the mean price in each country.
1
0
0

T
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a
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- 724 -
201
Appendix II (cont'd)
* Trading costs
Four typical cases have been considered:
products of known quality and specification which only
require the purchaser to identify several suppliers,
obtain quotations and place an order: Assume 2 man-days
@ 500 ecu (man-day cost including support services and
overheads ) = 1,000 ecus
eg. pharmaceuticals
products which require submission and testing of a
sample or product literature, formal bidding procedure,
and/or more complex shipping arrangements than the first
case: i'lssume 4 man-days @ 500 ecus = 2,000 ect.:s
eg. street lamps, fluorescent tubes, filing cabinets,
cement, pap_er
products requiring formal bidding procedure
purchasers 'visit to suppliers'
evaluation and/or complex shipping
10 man-days @ 500 ecus = 5,000 ecus
premises,
formalities:
eg. furniture, vehicles, electronic equipment
and/or
product
assume
products requiring formal bidding procedures and full
technical evaluation and testing of the products, visits
to suppliers premises, contract negotiation, design or
prototype development, and/or on-going quality
assurance: assume 20 man-days @ 500 ecus = 10,000 ecus
eg. power cables, uniforms, transformers, railway
wagons, telephones.
725 -
202
Appendix II (contd)
None of the products on the price effect 1 i st require very
costly design and bidding procedures such as the case study
products would require, which might run into hundreds of
thousands of Ecus per contract.
The trading cost is expressed as a percent of contract value
by choosing a typical contract size:
Contract value = unit cost * order size
(trading%) = (trading cost)/(contract value).
* Foreign exchange cover
There is an exchange risk in all foreign contracts. Buyers
~ o u l insure against the risk by buying currency forward. In
practice public purchasers will not normally do so. The cost
of doing so is, however, a measure of the risk. This clearly
depends on the currencies: in some cases there is a gain.
Typic a 1 spreads are .:!:. 5 percent per year. A subjective 2
percent of the suppliers price is assumed (based on a 2 year
contract with payments .. on average .. one year ahead).
* Trading risk
An estimated 2 percent for the insurance cost of the risk of
interruption of supply is assumed. In practice, the
consultants interviews with purchasing officers suggests that
they are generally very risk averse - they are judged mainly
on supply performance not cost effectiveness, so the sum of
the above two risk premia is probably higher than the
4 percent that has been assumed - they would want to save more
than 4 percent before abandoning a secure local supplier.
- 726 -
203
Appendix II (cont'd)
11.2 Potential Savings Factors
Tables II.2 (a) to (e) show for each purchasing country and each
product the calculation of potential savings factors. Each table
shows:
* the savings thresho 1 d for purchases from each of the four
potential trading partners, as calculated above
*the price advantage sho,wn for suppliers in each potential
trading partner (the mean of price observations shown in Table
3.4 of the report),
ie. (home price) - (foreign price)
(home price)
(
if greater than 0
... 0 otherwise
* the saving for each pair of countries, equal to the price
advantage minus the savings threshold
* the potential saving, equal to the greatest saving out of each
pair of countries.
These potential savings are summarised in Table II.3.
11.3 Hermes Model Factors
The potential savings factors, and also the changes in import
penetration, have been aggregated to macro-sectoral level for use in
the Hermes Suite of models by Commission officials. These data are
shown in Table II.4.
727 -
204
Appendix II (contd)
TABLE Il.l(a) -ESTIMATION OF SAVINGS THRESHOLDS (Belg;um)
- 728 -
205
---------------------------------------------------------------------------------------------------------------------
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2000
i.H)t)
i
,),:
0.3
:ooo
., ..
---

:S:)CO
.).4.
0.3
:)l)f)

a9:ooo
1),1)5

2000
113


1),,)0025
.
'
2()!)1)

.;r.
---------------------------------------------------------------------------------------------------------------------
F'raf!l
IZI
ri1sk ?reuJI
3ERHtlNY

Ill sk re111u1
:TAL'!
\%)
uk
rro'l UK
tnn ;gort ar'!lll'U m
. re!Dl-.1
300
91)1)


""
Jtt
q
81.
5%
.,.,
''"
..,,.,
"'!'

.h
36
117.

Z7
3!
69:
:r.
27
231.
li)8
,.,.,
"Jit.

16

3-:t
,.,
'"

4.5
,.,
1/,
ol%
4.5
I"
!'.
e:
1),:}75
,.
l,s
.,.,
.J!.
Q.ZZS
;n
.,.,
"'
0.075
0%
H
t),i)i5
oz
1)%
J.075
,),=zs

Oi.
0.075
07.
l)l
---------------------------------------------------------------------------------------------------------------------
7GTAL SAVINGS
1BX
17Y.
m
1b%
.,
l!t
---------------------------------------------------------------------------------------------------------------------
: \ 3EUC Data
SOST
JRDER mE
CONTRACi VALUE
DR VDUJI'IE
(ECll/TN.K.Jl

iRAOHIS 3iJB- TOTAL
rJ:J FRANCE
oretlUI (%)
Pre111u!l
GER!'!AilY

R1sk Pre111u1
::r<J!I !TAL'f
1%)
a1sk Preill'!!l
:roll

900
:00
i electro ohar:t averaae 'liO

:oo
:94QOO
1),.3
i) .3
,.
''
216
37.
4Y.
., ..
!.
..
,.,
lgraoh Jf cai
1413
10
:41:0
1).1
1
.so co
. .,.,
.J"J!.
90
'.
o.
H
60
:)1)1)1)
600000

1
!')1)1)0
:7.
) ,1

'"''
n
, .,
_,
5%
,.


:7.
,.,
m
1 :)1)1)

t}.1
1),:::
tOQQ
27
3%
4"
.h
10026
100
1002565
1
),:
501)1)
!);:
130
.,.
-
:7.
bO
..
llo
mas
\1)1)
m:eoo
.)
,) .1

2711
:l

.J:t
bus
d8
1000000
100 iilO
;1:::400
::: !6
t),l O.OJ
5000 510

2:'0
:oz
...
,u,
0(!
1)7.
:)694
!00

J
:) .1
50!)1)
1;7.
10
270
. .,
.J!s
.)i:
..
1ft
tnnsoort ore!ll'jl} l ::i
Risk
:i. on

! - . rt .,, .i. .1 t!!" ..,r; lJ
= ....
729 -
OF SAVINGS
206
UNIT COST
ORDER S!ZE
Cm'HRACT VALUE
WEi GHi QR ;QLUIIE
TRANSPORT !ECUJTN,K!Il
TRADING
TRADING SUB-TOTAL
F rot FRANCE J)OK!I
transport pre11um
Risk Pretium
Froa oERIIANY
transport preaiut (XJ
Risk ?retiua
'rom ITALY 900K!I
transport pretiu !ll
Risk Presiu:a
From UK 300Ka
transport pretiua (ll
Risk Pruiua
SAVINGS THRESHOLD
(FRANCE -> BELSIUI!l
!SERMANY } BELGIUM!
-) BELGIUM)
WK -> SELGIUMl
: Atkins Survey
Dah
:6ii0/S7
Par1cet.

Fluor. klOJl Oifk! !Jni+Jr'l
4.50
!000
:505
0.<)005
10
tOOO
227.
I <'
....

100%
9'(
1.5
337.
2%
lamo tube desK desk csb1net paper
561. :o 28875. so
100
56120
0.01 iO
10 0.2
1000 [1)000
2%
30
57.
57.
30
'57.
2%
10
16%

30
57.
0%
127.
n
2U
77.
:
bOO
2%

1900
6%


2!.
37.

51.
i07.
57.

'11))

0.01
1
:ooo
77.
9
3'4
2%
3
17.
1%
1
.,.,
.h
!17.
m
9'4
3.!9
1000
)135
1).0005
.
'
2001}
0.15
57.
Z7.
0.15
SI
2%
0.45
14%
5%
0.15
57.
u
m
m
m
727.
48.79
!i)OI)

).1
t}.3
5000
9
187.
n
q
187.
oX
27
55%
37.

187.
27.
:42.60

102781
1
0.3
51)1)1)
57.
;o
211x
4t
90
267.
!:'1
Jh
ZN
m
27.
90
m
4%

400
t:::a
1),5
0.3
...
..

47.

..
JJ
m
57.
:7.
The r1sk for bath Atkins survey 1ata 1nd
BEUC data 1:1 ail
suooi1ers pr1ce aid hole
205.48
11)1)1)
2(t5.17q
l),o}!
1),3
101)01)
57.
11)1)1)1)


.
1J, .
2t)Qi)

1)7.
2% Sl

17. 191
.. ., .. .,
J' .JJ,
::unstat
:i,
:STIMATION OF SAVINGS (Belgium!
VNIT COST
ORDER SIZE
CnNTRACT 'JALUE
WEIGHT OR VOLUME

TRADING
TRADING SUB-TOTAL
'rot FRANCE 300Kt
transoort ore1iu1 (%!
Risk ?re11u1
Fro1 SERI1ANY
tnnsport pretiua (7.!
Risk Pretia
F roil ! i Al Y 900Ki1
transport pretiua (%)
i'rl!I!IJI
Fro1 UK
transoort 17.)
Risk rruiue
iOTAL SAYINGS THRESHOLD
1
FRANCE -> SEL5IUI1l
(6ERI1ANY -> 9ELSlUMl
(ITALY -> SELSIU11l
IIJK -> SELGiiJI1l
: Survey

Cel!lent Ooel Fiat Cardiac (-r.w Tnns- Soods Telephone
Ducato iranso. Mon1tor Jlc. former
b5 .
100
6531
!
0.1
2000
6701.09
100

1
9.2
5001)
ll
bO
17.
51
180
3%
57.
60
17.
51
83-t4.24
100
e:4424
A
'
0.2
5000
1l
120
120
1%
4%
3415.79
100
941579
2
sooo
II
120
1%
57.
120
!X
4%
2698.10 , 63471.10
5 1 11)1) !00
13491 138311 6347!10
1). 1 1 3 t:
1 i 0.3 0.1
5000 1001)1) 1001)1)
374
30
17.
4%
30
17.
4%
90
..
.
4!.

:ji,
57.
:oo
1)7,
sx
ti.
270
2?0

.jJ,
TI
390
1170
!7.
iOOOO
:95241
l),i)l
11)1))0
..
-.!.
!'-''
.. \.oo.l
731 -
207
Appendix II (cont'd)
TABLE II.l(b)- ESTIMATION OF SAVINGS THRESHOLDS (France)
- 732

.. :;v::J63

1

:2o1net
BELt3!UI4

R1sk ?re11iua

tr1nsocrt C%l
s13k
Fra:J iillL'f

Pret!JiUII
Fr'Jm UK
transoort or!tlUI (:l
Pr!!lllUII
SAVINGS
iBEL5IUM -.. FRANCEl
-1 FRANCEl
(!TALY -\ t:RANCEl
( IJK -\
2:'11?187


t8GO
400
SAVINGS THRESHOLD tFrance!
15
11i.

127.
!S%
....
""
1 Si.
- .
.. c ...
:oo
109ZC0
1) I 3
,.,.
J
t:o
....
...... ,.
jQi.
58%
327.
:sa
tf)l)


).3
:ooo
I.
l!t

:n
.,
Vl11
167.
Zi
.,.
.,o
m
2%
tyee
r



.).l
3
21)1)1/
'. lh
bQ
2?7.

48
m
3%

Oi:
. .,
.J.'t
7.5
1i:
34
12
...
lh
57.
6

54
trans. I telephone phart >verage van
/griph of car b6
TRADH16 SUS- TQDL
SELSilJI't
!rinsoort ore11aa
qui< ?rel!lilll
F
pre1iu1
qlSK P'"e!!llUI
t:ro111 !iALY
ill
RlSk Pr!!UU11
UK
trin>oort or!!tiua
'1sk ;)reuull
3ource : Eurast1t & Jatl
:1)1)
51)!)
81)0
-'00

[1)1)
332800
1\3
t), 3
10000
i2
..
..
9e
.,.,
J '
.,.
.....
1364
10

!).1
1
5000
10

47,
4%
30
57
!0000
370000

1
lQOQc)
I r:
.....


2.*
...
Jfo
27.
b83
1000
682560
Q,!
0.3
1000
1)7.
9

57.
:s

10946
[1)0
11)94612
l
0.2

1)7,
100


so
,.,
...
n
1:409
1C/O
moqoo
.
j
0.1
%01)
li

t.

..
l..
r:u
""

-'
....
H
.)7,
' ...
"-

1),(11)0ZS
l
:ooo

07.
4%
' .
'!.
67.
.
0.1

i)7.
90
,.,
...
u.
!50
I.
'
.,.,
Jo
208
,J.lper oi:
I!
OilS
d8

::0

0.1
,, .
. ; .....

24
... ,
"
77.
.. ... '.
127.
16i:
81
!99884
PO
19998400
ll
),1)3
S1)i)Q

Ito
144

,,.
J!

dll
.. f .... ,
........... j
1
.,
'
tL:
,.,
: ..

0.1
l)i:
""
....
J
0.1.

i)7.
::?
,.,
l'
..
".\
TS3 -

:ST!l'!AT!CN QF SAYtiGS THRESHOLD (rnnc2l
209
------------------------------------------------------------------------------------------------------------------

P.Jracet. ?ower Str2et Fluor. 3choo! o tice
....
!Jni f!Jrll
" .
. 11 ::1o .opler
... ;ng :able laap desk desk cab1net per
------------------------------------------------------------------------------------------------------------------
UNIT COST 8.)1 615.34 20198.99 260;28 1.50 -lS,U
167.32 125.35 4.12
ORCER SiZE 1000 100 50 100
[f)!)!)
1000 4QO 1000 10001)
VALUE BOOB 26028 149q 45441 110\':lb m4z 125350 41211
GR 'IOLUI!E
1),1)1)1)5 O.Ql 11) 0.01 0.0005 O.i ! 0.5
O,i)! 0.002-t
iRAtlSPOiiT (ECU,HUil 1:) 10 0.2 1 l 0.3 0.1 0.3
1),)
TRADING 1000 101)1) 10001) 2000 2000
5:)1)1) 501)1) 2000
11)1)01) 2000
------------------------------------------------------------------------------------------------------------------
TRADING 3UB-iOTAL m :7. 1X 87. l337. 117. 57. 27. 57.
------------------------------------------------------------------------------------------------------------------
Fro11 BELGIUI'I !.5 30 000 3 0.15
q
90 .tS 0.9 o.
transport m 19I 51 37. 17. 107. 207. 251 19% 1% 57.
Risk 27. 4X H n 87. 47. H H
-
/1, 1i:
Fro1 GERMANY 2.5 so 1000 5 0.25 15 !SO iS !.5 0.36
m 87. 57. 27. li'T. l11. 127, 1% 91,
relliUII 37.
.,.
47.
..,
57. 5% bl Jl
,.,
1./o
.)!, .,,,
ITALY 800K1 4 60 1600 a
i), 4 24 240 t:0 0.576
transoort m 507. m az 3'1: m

J)h 657. s 4/o 27. m
Risk Pre11iua 5% 57. 47. 27. 127. 27. Si. 57. 37.
Fro1 UK 400K.ll 2 40 BOO 4 0.2 12 1ZO 60 1.2 0.288
transoort or!!tiut (7.)
m 67. 47. zx m
-r-.,
m 17.
_.,
,J,J/, /,
Risk Presiu 17. oz 4% 1% 9%

r"
Zl 3% 3%

J/o
------------------------------------------------------------------------------------------------------------------
TOTAL THRESHOLD
(SELSIUI'I -> RANCE! 137. 10% lOt 137. 152I :3% 25'% !5Z t:z
iSERI'IANY -> FRAHCEl m 117. 107. m 1557. 107. 501. lS7.
(ITALY-\ 687. 19t m m mz m m m 15% 22%
fiJI( -}
FRANCE! 397. 8'% 97. 107. !55'% 407. 417. 107. tz:. !57.
------------------------------------------------------------------------------------------------------------------
Source
.
Atkins Survey .
Data
Zb/!0/37
ESTIMATION OF SAVINGS
Ceunt Ooel Fiat Cardiac Trans- S!Jods Teleghone
Ascona Due a to in.nsp.
"onitor
1/C, foraer wagon
---------------------------------------------------------------------------------------------------------
UNIT COST 7978.35 10078.62 10491.42
ZB4o.52 '''*''''' 9442.38
53.65
GliDER SIZE 100 100 100 100 5 1 100 100 10000
CmHRACT VALUE b8BB 797835 1007862 1049142 14233 lbl7b4 944238 5241749
WEIGHT OR vOLIJl1E 1 1 2 2 I) .1 1
.)
13 0.01
mNSPORT iECU/iN.Kl 0.1 0.2 o.: 0.2 1 1

0.1 1
iRADINS 2000 sooo 5000 5000 5000 10000 10000 !I)Ot)O
---------------------------------------------------------------------------------------------------------
TRADING SUB-TOTAL 297. 17. 0'% ox m 3% lt 07. 27.
---------------------------------------------------------------------------------------------------------
r rot 3ELG lUI!
.)0
60 120 t:o 300 270 3
tr2nsoort oretiu m 17. ..

"

"
n . }%
, .
"

RHk PrellliUI 47.

. .,
1h n 57. il Jlo
Fro1 6ER!'!ANY SOOKI so 100 200 200 50 500 650 5
pretiut Ill 737. u

27. 2%
1)7,
57. 1i 97.
_,,
Risk retiut 4l u 4% 4l 4l 47. Tt 57. 37.
Frat ITALY SOOKt so 160 120 1:0 80 300 720 1040 3
?rea1ut ill 1167. 27. 37. 37.
'n
87. lSI
Riik Preuu11 3'% 47. 47. H 47.
.)7,
_.,
H
... .,
'"

Fro1 UK
o 80 160 160 40 300 520
4
transport orel!llUI m 587.
. . , .
:7.
oy
I)Y.
n
77.
... ,.
1!
Risk Prea1u1 4% 4%
. .,


3i 47. 57, Z% Jh J!o
---------------------------------------------------------------------------------------------------------
TOTAL SAVINGS THRESHOLD
iBELSIUM -\ ?bl 5% 5% 57. 407.
;
87.

lOI
!GER"ANY -> 1067.
.)7,
417. 7'. n
-,
1 . ,. 411
1487. i%
_.,
az

12?.

1ar.
...
..
; IJK -> rRAtiCEl 917. 57. 67.
e
407. l7. 97.
;x
',.
.J!. 11/o
---------------------------------------------------------------------------------------------------------
Sourcg : Atkins Suryey
Data
735 -
210
Appendix II (cont'd)
TABLE II.l(c)- ESTIMATION OF SAYINGS THRESHOLDS (Germany)
736 -
:7
GF
211
---------------------------------------------------------------------------------------------------------------------


:;, l 't-:


:1::
II
---------------------------------------------------------------------------------------------------------------------
tr)QI)

1\jQ

1). 4.
.,
), ..
...... ,,
,..H.IJ
28i
\1)!)1)
S07100
1).
'
I}; .J

! .. 1
SQO

0
I
20Qr)

l'
S{}t)

1)

.
---------------------------------------------------------------------------------------------------------------------

'"''
---------------------------------------------------------------------------------------------------------------------



IZI

Fram


DlO
500
)!)!)
f7CO
15

..
).
:1
.
l.'!t
)h

l.).',
6i.
3%
34
r).<Ji5
l
4.7. .;,1,
01.
C:'f ,.,
wJ. .. !,
!0.5
17.
bl.
0. t5
6
..
'
'.

Jt.

:.i.
. ., , ..
.... '!
i3
' r:
........
..

'),
'.
l/,
---------------------------------------------------------------------------------------------------------------------
Z1 t
!OX
14\
m
i'37.
267.
,,.,.,
... ,.,
16%
Z47.
297.


1
S2mnvl
trans. I teleohone ohar1
/gn!lh
!)00
tj
1 :Or}!)
r),!
1
50!)r)
to:
[(!,)!)!)

1), 103
1514
l}C(j
151 :c,JO
:),!
,). :;
[ljlj.)
:;

, ...
van
Jt car iJ6
'
o.z
5:)1)1)

1)
!U6:oo
J
., '
.......


lr)!)
11i5aoo

bus
dS
t'"'Q, .. .,
.: ..

......... _
' '
.' 1

30B-iCi4L
3ELS IUM

><i;k
;:r-:1








t6:)!)
'"'')0

...
:-
J.
. ,,
J.
..
...
,.
.,,
). 9


41
1.5
..
.,

Jh
. .
....
!)'(
i':
..
...

{.it
:t
..
!'
.
. ..
,,

:oo
'.
,.,
-+l
::o
,.
...
l7,
Q(t
,.
..
.',
l3!)
..
lo

.,1.,
-
'.
,.,
'"
.,
4.'1
. .
..
!30
. ..
..
.,
:! )
..
-'
' .
....
.. ,
..
::a
..
'"
. o
.,.1
'''
. .
,, ..
!
l"
=
.t.
"'
._,,,
., ,
-J. ...


-
-
17-ll! -.
. '1K -' I
..
"
...
iJ.'
1 y
' .
..
. ,,
...

'.
. . .
=
. '

737 -
COEi
St:E

ill '/Oll!IIE
TRANSPORT
TRADING
TRADING
F ro BEU3 IUM 300Ki1
transport premiu11 (',)
Risk Premiu:1
From SOOK1
tr!nsoort ill
Risk Prem1u1
From
transoort pretlUI ih)
R1sk Pre!liu!l
Fro
oremium !7.l
Risk Premiu
TOTAL SAVINGS THRESHOLD
!9EL6IU" -\
IFRANCE ->
->
( tJK -\ GERI'!ANY l
Source : Survey
Data
:ot10i8i
PoKer
... cable

1000

t),t)i)Q5
!0
1000
167.
1.5
z.s
39%
St
3.5
557.
17.
:Ol.b9 19449.51
1!)0
30to9 mm
I) ,1)1 10
10 o.:
1000 100t)l)
:o
10%
7t
50
m
87.
lO
m
111,
70
Zit
n

2SX
34%
2i7.
17.
}l
l7.
1000
51.
41
1:oo
bZ
47.
1400
7'1.
4%
!Oi;
!07.
1
,.
..
1:7.
212
;:iuor. S:hJJl Gi:e iJnifJn
tube desK
192. 9i
!GO
i9:?7
O,tll
l
:)01)
107.
5

H
7

17.
16%
137.
m
15%
1. 71
:ooo
!i13
) ,1)1)1)5
1
ZOt)O
1177.
>.15

T!.
l.ZS
lSi.
47.
, ..... .,
JJI
, ... '!:'.,
1-J '
144%
1m
...
'"
9


15
227.
...
J/o
21
m
17.
23%
m
35%
m

:oo
10
Z07.
37.
150

37.
180
.tO%
2%
210
477.

340.71
4N
13bZB.t
r) .5
O.J
201)1)
..
1h

' ...
1(15

2%
1
1'!
'.
m
327.
m

1000
79358
0.01

1 ')1)1)1)
4, 44
!00!)1)

). )):
o .. 3
20)0
1
). 216
...
""
..
"'
..
'
li7.
uF THRESHOLD i3ermanyl
---------------------------------------------------------------------------------------------------------
UNIT COST
ORDER SIZE
CCNTRACT
OR
TRANSPORT (ECU/TN.K31
TRADING
TRADING SUB-TOTAL
Fm BELGllJ"
(7.)
R1sk Pre111UII
Frot FRANCE
pre11ul (7.)
Risk ?remiul
Frot ITALY bOOK1
transoort ore11iu1 ill
Risk
Frat UK
tr!nsoort \Xi
R1sk Premium
TQiAL
3otJrce : Atk '3tJrv!y
Data
Ce11ent aoel '1'4 C.!rduc X-r!v
Ducato t/c.
Tnns- Goods
foner 11agon
71.18
100
72!8
1
0.1
zooo

! .
!(l


7809.61
11)1)
780961
I
0.2
5000
11.
bO
lZ
j7,
iOO
17.
4X
110

47.
91911,41) 9309.27
!0!) 11)Q
1904)
z
0.2
SlOO
110
ll
l%
240

zso

. '
..
...



,,

I'

"

SOQO
1%
zoo

51
2957.JO llllllCll i628.29
5 l 110 !)I)
1.t'85 7t:taas
.).[ I .)
! 1 0.3 0.1
5)1)!) 1 QI)!)Q 1000t)
50


..
)lo
500
07.
1
:t
'.
'l/,
Sl
t)%
t
'

I
,,,



ti)(H)i)
mm
1),1H
!0()1)1)
..
..
bl
..
..
739 -
213
Appendix II (cont'd)
TABLE Il.l(d}- ESTIMATION OF SAVINGS THRESHOLDS (Italy}
1'40 -
.. , . ..,
- ' ' :'
'
9
1..1
:.:u./'
214
---------------------------------------------------------------------------------------------------------------------

(7,)

: Fl(ANCE
tr1noort ltl

.3ER1WF
i%1
?reili'J:t
:,.'Jm
!Xl

-lL SAV PIGS THRE5HOLu
t5EL3!UM -1
(f:'RANCE -; mm
i aE?t1ANY -:, mLYl
\UK -, !i.l!..V)
::! :0.'37
r::oo
t:1.:oo
;lied
Ciblnet
!iiJ
l
1'):)01)1)
t) t t
i),3
"' .... , ..
- )ljlJ
19:i
67.
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!92
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n
288

u
m
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387.
....
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31

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0.1

....
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:STI'!AT!UN SAVI:l65 TllRE5HOLJ :Hal y)
'RAO!NG :US-TOTAL
r'Jil BELa r:JI'
itl
i uk

?re1111U1t
Fro11 SERI!ANY
transoort oretlUI \Xi
Rtik
:r:t !JK
tr1noort

0
reuull
900
mo
W!
tr1ns. l t2lephone ohar1 iter1ae
/graoh caf

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Hn
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100
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3%
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t:

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r:
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3TIMATiON .JF THRESHOLD i Eal,)
215
-----------------------------------------------------------------------------------------------------------------

Parscet. ?JIIer Street Fluor. 3ch'Jol Ofl ice Fil1ng :Jn 1 for CJOler
L llg cable iuo desk
jegk
paper
-----------------------------------------------------------------------------------------------------------------
Nli COST D. 61 :o1S7.17 123.20 J .
1\DER SIZE ilOO 100 so
ll)t) 101)1)
CIHI\ACT 10614 93327 1007958 12320 4351
EIGHT aR 'itJLUI'!E O.!)i)1)5 0.01 10
) ,t)l
1).0005
RANSFaRT 10 10 0.2 1 1
RAD!NG 1000 lOOt) 10000 zooo 2000
RAOING SUB-iOTAL
roa 3ELSIUII QOOKI 4.5 90 1800 1 0.45
ransport pre1iu1 m

117. 97. n 107. LJ.
i;k Pre11iu11 21 6>: 97. sz
ro1 FRANCE BOOKI 4
go
1600 B
1),4
ransoort pr!tium
(X) .m 107. 87. 67.
Qi,
isk Pre1iua
. .,
37. u 87. n
ra1 SERIIANY .)OOKII 3
.)Q
1200 b
1).3
ransoort pre1iu1 m 287. n 67. 57.
,
isk Pre11iut 27. 17. u
.;r.
27.
ro1 UK 1 , 200Kll 6 t:o 2400 12 0.6
ransoort oremiu1 ti.l 571. H7. 127. 107. 14%
isk Premb!l 17. 07. 4Z 27.
..
)I,
30.56
r
tv.o m.:6
tl)l}t)
300
41)1)
52166 !26545
0.1 I
0.3 0 . 3
)1)01}
5000 ZO(J'i
2I
27 270 t" j.J
887. 1557.
ax ax
..
H
24 240 !ZO
;q'-
mr. 387.
bi.

ta !80

59'. ton :az
97. 101.
,.
.h
36 :60 i80
!lSi. Z077. S7i.
37. 7l Z%
146.51
1000

1),;)1

100>)0
..
{',

,,,
.,.,

67.

'"
31
l.3

. '

,,,
:.6

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:.t?1
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,, .

2001)
77.
().6ol8
,.,.,

57.
U7b
:or.
'.
Oh
O.l3Z
IC'.,

.;x
L864
307.
57.
-----------------------------------------------------------------------------------------------------------------
OTAL SAVINGS THRESHOLD
tBELSIUI1 -> !TALYl 547. lSi. 167.
.. .,
597. 111% 1737.

34I
,
(FRANCE -> ITALY! 507. Hi. m Si! 1017. 1567. m t:7.
(6Eni!ANY ITALY! 40% 107. 117. :n 541. 12:% m 107. :ax
!UK -> ITALY! an lOX m
'87.
637. 1377, 224% m m
-----------------------------------------------------------------------------------------------------------------
ource : Atkins .311rvey
Data
&/l0/87
ST!l'IATION QF SAVINGS THRESHOLD (l!alyl
--------------------------------------------------------------------------------------------------------
Ce1ent .Joel Fi1t \IW CJrdiac x-ray Tnns- 3JOdS
Ascona Due a to Transp. Mon1tor 1/c. torller wagon
--------------------------------------------------------------------------------------------------------
iNIT COST 51.55 9607.87 10973.55 2925.75 tllllllll 6874.45 58603.77 20 .
IRDER 'iii:E 100 100 !00 100

1 100 100
lt)(ll)l)
:ONTRACT VALUE
54C:C'
793336 960787 1097155 14629 226424 5860377 ZOS97Q
1ww
IE I GHT OR VOLUME 1 1

2
1),1 l

1;
t), t}!
4
'
'RANSPORT (ECUJTN.KIIl 0.1 0.2 0.2 o.z 1 1
!) . 3 0.1
.
1
"RADING zooo 5000 5000 5000 5000 5000 10000 10000
1 1)1)1)1)
--------------------------------------------------------------------------------------------------------
"RADIIIG SUB-TOTAL 17. 17. 01. .m Z7. It ox 5:\
--------------------------------------------------------------------------------------------------------
:rot BELGIU" 900Kil
qo
180

90 ?QO 310 I 170

:ransoort oret1u1
(X)
!i5I

u :x
1)% !""
..
J"'
"
.:.h
-
.. ,
tisk Pr!UUI
C'V
:i:
..
37. n 27.

l7,

.JJ.
'"
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'rol FRANCE 80 160 320 90 300 720 3
:nnsport pr!!lllll
(7,)
155I

37.

t)'t tl)'t :'.

l.!
j; Jlo
tisk Pre!llul
..
4l 4% 4l u 3l 51
l%
4"
: ro!l 5ERMANY MOKt 60 120 240 240 60 bOO 790 6
:ransgort m 2l Z7.
''
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"'

1
... 1 ,
67. 47. t7.
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47. - H tisk . remi;J
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1. :OOKII 1:0 :40 480 480 t:o t:oo !)80 !560

!':,)
2:31
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47. 41.
!
m

587.


.:.
,,,
tislc PretlUI 57. Jl 47.
...
l
:l
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H ... ,.

.tlo
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!SELS!IJII
-\
ITALYl 67. 3l
-
l11,
C''f
[Q'(
,.,

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mm
1QQ1, 7i

417,
57.
t
''

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mul lbli:
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bh
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ttJK -> IiALYl
.....
.3h n 37. m
e

..
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':. , J.t. I.J'
..
iource : rltkLns Survev
aata .
743 -
216
Appendix II (cont'd)
TABLE II.l(e) -ESTIMATION OF SAVINGS THRESHOLDS (UK)
217
---------------------------------------------------------------------------------------------------------------------
itnrina
1r1:1i1r :i;:n;t
.. :1 ..
ii
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Z7. 2X
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c ..
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tr1nsoort pra11uil iXl
Risk Pre'!!lU!I
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tran;oort
R1il:

trinsaort oreiliua (i.)
R1sk

-: UK'
, qMICE - > iJn
i cERMANY -!
1
.JK l
';mv -1 UKl
::.t 1:;197
400
ESiiMAiiDN OF TilRESHGLD (\JKi

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1isk
=:,MlCE
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avenoe y.1n
of .:ar Ob
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SA'; I NGS i'iRE5rGLD
745
fT
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mlACi
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SUB-T!JTAL
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sk Pre11iua
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oretiut !Xl
;k Pra11ium
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ansport ( '0
Pre!liu!l
011 !iALY 1,200
ansoort IXl
sk Prel!liull
TAL SAVINGS THRESHOLD
SELSIUM -> UKl
FRANCE -> !JKl
SERIIANY -1 uKl
!iALY -> IJKl
IJrce : Survey
Data
110/37


" =,.,
J
ll)t)tj

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218
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OF THRESHOLD !UKl
IT
DER SIZE
NTRACi VALUE
!SHT QR VOLUI'!E
ANSPaRi (tCUJTN,KIIl
AOINS
ADINS SUB-TOTAL
o

:oo

sk
011 FRANCE 400
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-------------------------------------------------------------------------------------------------------
: 3urvev
)at a
747 -
219
1dix II (cant d)
TABLE II.2(a) - CALCULATION OF POTENTIAL SAVINGS FACTORS (Belg;um)
220
---------------------------------------------------------------------------------------------------------------------
!i!2
caonet
;;;:1 :e:
: !al( l
Hoar
11
---------------------------------------------------------------------------------------------------------------------
SAViNGS
.FRANCE ->
->
:mLY - . 3ELSIU11)
IIJK -1
?1\I:E
F'GR SUPPUER3:
FRANCE
3ERI'IANY
r:m
ij!(
POTEiH!AL SAVING ;lfiER
SAVINGS THRESHOLD
3UYIN6 !=l\CI'!
MAX SAVINGS
:aurc! : Eurostat BEUC Data
27/10/87
1.17.
m
.,.,.,
.:.o.;,


ox
l5l
n
>%
ox
07.
>i:
07.
JF SAViNGS '4CTORS (Be!g1u1l
31:.
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307.
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()
h
07.
oz
ox

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trans. I electro averaae van
5AVIN6S THRESHCLD
-"> BELm14:
{6ERI'!ANY -> BELSIIJI'Il
-> EELSIUI'Il
(UK - '> SELal Ul'! l
mAT"i'JE :!liCE
FOR SUPPUERS:
'=lANCE
GERI'IANY
iT.:ILY
IJK
POTENTIAL
-:iWiNGS iHRESHOLD
3UYING FRO!!
m

15%
127.
Ol
OX
n
07.
G7.
Jt!'.t'IHIIY )7.
ITALY 0t
Jf :1r bil
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07. H7. .)7, )Y. .. , , ,

- 749 -
221
JlJOXlfl
. .:ab l
Street Fluor. Office Fiiing Unifor Copier
1 NGS
-; 9EL5!UMl
iGER!'IArlY -> 3EI..GIUXJ
iiTALt _,
\UK -) &ELG!IJIP
RELATIVE PRICE
FOR 3UPPUER3:
FRANCE
GERMANY
mL'f
IJI(
POTENTIAL SAYHlS 1F7ER
SA'IIIIGS TliRESHOLD
FRGM :
FRi\NCE

liALY
UK
SAVINGS
3aurce : :urvev
Jata


...

t
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587.

n
OX
m
0%
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aox
86%

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107.
sx
24%
271
201
28X
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desk t1b1net
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m
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n
0%
227.
m
667.
m
m
Oi.
07.
l)i,
ox
ox
07.
207.
20%
157.
367.
36l

07.
07.
07.
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0%
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ool
24i.
07.
0%
07.
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207.
397.
bl7.
"Q"

su
31%
557.
207.
46%
557.
CALCULATION OF POTENTIAL SAVINGS FACiOR !Belgiull
TOTAL SAVINGS THRESHOLD
!FFANCE -> BELSIUI'Il
tGERIII\NY -> BELGliJIIl
- 8ELSIU"I
!!JK -> BEL6IIJIII
PRICE
3UPPLI ERS:
rRAtlCE


IJK
POTENTIAL 3AVIN6
THRESHOLD WHEN
BUYING Rul'l :
::OANCE
GERl"ANY
ITALY
IJY.
Cement Ooel Fist
1
1W Cardiac X-ray irans- Goods Telephone
a OuCl to T nnsp. lion i t<Jr 1/ c. foner 11agon
81%
817.
17:%
Bli.
1)%
07.
ox
ox
m
43I
m
427.
0%
t}%
n
07.
ox
257.
?t
07.
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137.
8X
i1.

97.
1)7,
'17.

07.
u
57.
ox
54
137.
1)7.
.,.,
1)7,
tox
m
277.
m
0" . {,
ox
:o:;:
197.
--------------------------------------------------------------------------------------------------------
SAVINGS
Ol OX ox ')7.
18% 131
--------------------------------------------------------------------------------------------------------
:

m
l8i:
297.
1!7.
ox

m
Ol
ox
0'.
07.
Oi.
07.
- 751 -
222
Appendix II (cont'd)
TABLE 11.2(b) - CALCULATION OF POTENTIAL SAVINGS FACTORS (France)
- 752 -
223
---------------------------------------------------------------------------------------------------------------------
file

mer
.1
---------------------------------------------------------------------------------------------------------------------
...... ,.11
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'3AV!NG'3 THRESHOLD
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04
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3ERMANY 1)7. 1)7.
07.

07. 107. 07.
q
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,.,,
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---------------------------------------------------------------------------------------------------------------------
i'44X 07. 1?7. )7. 107. m
1)7,
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.:. .. :.
---------------------------------------------------------------------------------------------------------------------
Sa,Jr:2 : BEUC Oiti
:i:tom
GF PQiENTIAL 3AVIN63 (Franca)
---------------------------------------------------------------------------------------------------------------------
trlns. ! tele!lhone phar:a average nn
tqnph lf :ar
van


dS
---------------------------------------------------------------------------------------------------------------------
3AVINGS THRESHOLD
'SEi.3IUI'I
_,
FflANCEl 94
.
""
6I
., .
57.
4%
)"!. ll

h J!
I :3ERMANY
-;)
m
ux 87. 11':
..
57.



-: 127.
..
6t a7.
L

117.

!',
....
J '
-
iUK
-

,,.,
.tY. n 57.

iLlt
.. I.
qE,,FiVE P
1
?ICE
FOil SUPPL!1\S:
3EL5IUI'I !47.

)%
37. :6X

..
J"
'"


.)7.

:)7,
'"
.,.,
177.
...

"''
Va . .,:. :,.;!.
!
1
!il'l
....
07. :97.
,.
)1 1)4


,.
..
1
llt '.i't.
:JK
.
'"
.. .. . ,.
Ji '
11[, IJ,, '!Is 1 .,
""'''
POTENTIAL SAVING
'3AV!N6S
BUYING

!E!.JIUM
..

m .1%
, ..
21; ')l
'Ji. ),,
07.
AV

, .. 0 1n
''
IJh
!I
\)I,
""'''
,.,
..J!s
.)X
M
)I
'"
....

J
).', .u.
!JK 07. 07.
.
IJ.;;I,
,.
ljl,
n

---------------------------------------------------------------------------------------------------------------------
SAiliNGS

i)7. )h
.,,.
IJ.llo
.-l '
---------------------------------------------------------------------------------------------------------------------
: SEUC G.it2
- 753.:..
26!10ta7
1F POTENTIAL !Fmc!!l
224
-----------------------------------------------------------------------------------------------------------------
Parat:et. Pelle!" Str!!!t Fl'lOr. School Filina !Jndar1 Cooler
cable tub!! desk desk Ciblnit

iOTAL SAVINGS THRESHOLD
!BELSIUII -> FRANCE!
!GERMANY -\ 'RANCE!
(liALY ->
!UK -> FRANCEl
RELATIVE PRICE ADVANTAGE
FOR SUPPLIERS:
BELGIUII
GERIIANY
ITALY
UK
POTENTIAL SAVING AFTER
SAVINGS THRESHOLD WHEN
BUYING FROII :
BELGIUM
GERIIANY
ITAL'f
UK
"!"f"
JJ.
4i:
oax

i4X
207.
07.
687.
107.
ox
Ot
297.
!0!.
11!
19!.
37.
12%
537.
ox
947.
2X
m
07.
86%
10X
107.

Jh
97.
01
4X
Ot
57.
0%
ox
)%
ox

wh
131.
{"!'f
vn
107.
OX
267.
537.
737.
ox
m
407.
627.
152X
1S51.
,.,"'.,
.. 14.1

0!.
ox
07.
Qi.
Ol
Oi.
07.
07.

.)..;,,

..
..
407.
0%
01.
:sx
m

07.
07.
77.
..
.r.Jt.
507.

1 .. 1.
4'"
l.
71,
07.
53%
137.

....
07.
OX
OX
2SX

5!11.

27.
07.
!)%
m
1)7.
lX
04
lSX
lSi.
t:!.
m
l27.
n
25::
Oi.
1""

m
1.31.

t:'"f'
1Jl
m
o:
297.
177.
::c
07.
8%
27.
------------------------------------------------------------------------------------------------------------------
!'lAX SAVINGS
Source : Atkins Survey
Data
26/t0/87
29% 86%
CALCULATION OF POTENTIAL SAYINGS !France!
ox 627. 07. n ox lSI 257.
Ce1ent Opel Fiat VW Cardiac GJods
Astcna Ducato Transp. tic. forter wagon
TOTAL SAYINSS THRESHOLD
!BELGIUM -> FRANCE!
!GERMANY FRANCE!
tiTALY -) FRANCE!
{IJK > FRANCE l
RELATIVE PRICE ADVANTAGE
FOR SUPPLIERS:
BEL6IUI'I
SERI'IANY
ITALY
IJK
POTENTIAL SAVIN&
SAVINGS THRESHOLD WHEN
aUYING FROM :
BELGIUM
GERI'IANY
ITALY
IJK
i67.
lObl
148X
917.
57.
>X
251
31
ox
07.
n
ox
51
67.
7X
57.
167.
zx
!l
u
51
67.
7l
ax

..
,,
91.
57.
lU

-- .;x
ax
57.
2QX
11%
151
57.
ox
147.
40X

7i

67.
i)1,
10%
i57.
18t

167.
--------------------------------------------------------------------------------------------------------
"AX SAVINGS or. m 157.
IH or.
--------------------------------------------------------------------------------------------------------
Source : Atkins Surny
Jata
37.
- 755 -
225
Appendix II (contd)
TABLE 11.2{c) - CALCULATION OF POTENTIAL SAVINGS FACTORS {Germany)
756 -
226
---------------------------------------------------------------------------------------------------------------------
ll.'e1 ;il? sneli


.:;-;.iir
Jauar
i:
---------------------------------------------------------------------------------------------------------------------
., .. 'II
3AV l.':G3
I IJ I :-ott,.
::t:..:r:J:l
,.,, ..,,.,
4'"'
1t)7.
, .....


l"

-
l}' .;.ala !C.> .::. ::, ...
.::;:1HNY'
... .. .,
,,
.... , .
-\

'1 :t. :l'. Jt!!t
I
"'"
.46I
., .... ,

.....
If%


- iJ!t
.11,
'
/, 'J Lh
:u!<' !'3i:




''
sz
-' JVh
. ,,,


'%
SUP?Um:

)7,
5EL3:1Jfl1 :7:
tC''

(li: n m
1,.,
l. .. h wh .'I
,.
!87.
.,.
)7.
1'3h t'" n
,_.
.,.,
J!.


or..
!87.
.)%
<Jl
,n
..... .IJJ.
3 t:7. 111. 2i7. :97. m n 247. OX lSh
SA'J!'IS

3AV!N6S 74RESHOLJ
3'.;t:NS FRCII
m oz )X ox .n
.
<)%
lo
;:qm::
n ox ox ox
1)% 07. ox Oi:
..
lJ
iT,;L'

OZ O't
l)l
ox ox )X
,.,
.... )!
:Jf' 1)7. 07.
1)7.

,,.
'I !a l77. 1)7. !}7.
---------------------------------------------------------------------------------------------------------------------
:IM :sx
1)7.
)1. 1)7,
57.
!\)
1F PQTPHIAL SAVINGS (cenanvl
trtns. I electro teleohone ohara iYeraae van
tqnon lf bil
i)h
van
bi
l77.
bus

07.
bus
1!+
i)7.
---------------------------------------------------------------------------------------------------------------------
;j-:)L
3Aii!NGS TIIRESHOLD
'3E!..3iiJPf
-.
mMANYl
.. ,. . ..
37.
""
,.,
S!

... ......

.. I. ! J.'t
:FiMICE
- t!k


.. . ..




.,, ,,
Jh 'l J/a
!
...
"
: 5ERI'IANYl
t
.... ,
5%
..
'. '.
.,.,
'=:"'

... ll. ' . Jh Olo '\ ... :.
f!JK
-
. ..

....
)7. 77.
,.
. ;,,
... J.
. '
'EUTriE
lDVANTA6E
:lR .. !
2EL5!Uf'l m
:)I
..

....

l'jt
,.,

,,\
-

... .

,.
f)i. m


I
:)7,
lX
')%
I'
.... , .. !

.
')4
0'1

:)X
,.,

..
.. \) \ 'h
)1, ,,
'Ji. )i. ;i:
...
2')1.
!)7, .)X
.,.
I
)7.
.... ,, 1
1/a .. :.

3AV!NES
3UY;)lij f:'llQf'l


.

"'


l'
'Jl. JOh ')' &1.', .
c:;-lNCE o ,)1,

.,.,

'"

.,,
. '
"
II ..
,.'\1 .,
"" 07.
U7,

,..,.,
n
. . , ..
' ""1... ..:.
,.
) ' } '
., ...
JY .)7,
07. m 157.
1):
"
..

, .
"'
. ,,
.''
---------------------------------------------------------------------------------------------------------------------
3AVIN6S ));
?:::

,):( I I"
S%
. )1,
..
.. :. ... . .
---------------------------------------------------------------------------------------------------------------------
3'Jurc<! : EJrostat
757 -
26/10/97
OF POTENTIAL SAVINGS \Eer;ganvl
227
aiaoxin ?ar!tet. Power
nble
':itreet FltlOr.
lalllp
3chooi Filing Uniiarill Coaier

!BELSIUI'! -> 6ERIIANYl
! FRANCE ->
!ITALY -.\ SE;MANYl
WK -} GERI!Mm
RELATIVE PRICE
FOR SUPPLIERS:
oELSiUI'!

ITALY
UK
POTENTIAL SAVING
SAVINGS THRESHOLD
FROII :
BELSIUII
FRANCE
ITALY
UK
l!AX SAviNGS
Source : Atkins Survey
Data
Zo/i0/87
0%
ox
ox
Ol
Ol
QX
ox
ox
371.
0%
0%
ox
bOX
bO%
GF POTENTIAL SAVINGS !Seraanyl
10't
107.
m
m
n
07.
07.
17.
0%
Ol
0%
0%
07.
1BX
187.
lbl
m
ox
or.
m
b3T.

1)%
20%
48%
::x
35%
....
m
jesk desk :ab1net

zx
20%
25Y.
257. 157.

., ....
317.

,.
62::
e.,
L ... :.
S%
t)%
Z87.
281.
Ce1ent Opel Fiat VW Cardiac X-riy Tr1ns- Eoads
Ascona Ducato Transp. 11c. tOrler
3AVINSS THRESHOLD
iBELSIUII -> SERIIANYl
\FRANCE -> GERI'!ANYl
IJTALY -> SERI'!ANYl
cu;: -,; GERMNYl
PRICE ADVANTAGE
FOR SUPPLIERS:
BELSIUII
FRANCE
J";"ALY
UK
POTENTiAL SAVING AFTER
SAVINGS THRESHOLD
BUYING FROII :
m
101%
114%
128%
10'.
5%
m
ax
51
bi
oX
67.
H%
07.
OX
2%

.
t)7,
ox
.:,x
5'.
71.
8X
47.
07.
.
ll .

..,},
..
.

13i.

&./',

.....
'
t)i.
567.
42:
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
Souce : .3lrvey
a
1
?'1
. ..
187.
759 -
228
Appendix II (contd)
TABLE 11.2(d) - CALCULATION OF POTENTIAL SAVINGS FACTORS (Italy)
- ?f..f) -
---------------------------------------------------------------------------------------------------------------------
REL.Hi'/E oqiCE
FCR SUPPLIERS:
3ELSI1Jil
F'1ANCE
oER!!ANY
UK
POTENTIAL SAVi1S AFi:R
SAVINGS THRESHOLO
BUYINS FROM
3ELSIUi1
rRANCS
GERMANY
JK
SAVINGS
: \ 3EUC aata
27110/8;
...
.... !t
.
Ot.
.,.



t.
.
M
loll );,
07. 07.
07. 07.
07. 10X
07. 0%
li%
o:
;)t
07. ox
07. ox
.. .

m !:.s!.
:37.


l'
:,ar.
31: 0%
1bi: n
i)f.
:az 07. 07.
m 257.
07.
1)7.
O't
t)%
.. M

,_ ..
Vto
m 07. 07.
rACiORS {!talyl
TOTAL
:BEL6IUJ1 ITAL'fl
! FRANCE - mL'' '
( SERI'!ANY -/ ITALY l
!UK -'>
O!!!CE
FOR SUPPLIERS :
BELSI!J!!
".MICE
3El\t"ANY
!jK

SAV!tiG lF-:'Eil

3UYISG ::-ROJ1
BELSIUI1
FRANCE

IlK
:-tAX SAVHIGS
trans. I teleohone ohar van

157.
....
IJio
!07.
27.
07.

..
.)7,
.)l
07.
07.

I gr!Dh of car bb
.,.
-
57.

157.
1)7.
ox
0%
t)7.

7t
m
i27.
.)%
Qi.
0%
0%
57.

5Z
11,
.. ...
. .. jlo


. ' .:,,,

m

.. ., ...
.il,. J 1.'o
m
..
..:. .... :67.
!b7. 197.
m
.JX -+37.
m
V!O
b7
127.

dS
0"
""
37.
a:
71.



<0.>
07.
.. ..
.. :It
:n

...
ox

d14

tc

m
m

147.
.,.,
J I I
SQ7.
""
....
07.
,,.,
.. ,.
....
J-ll.

Q7.
. 761 -
Zb/11)/B7
CALCULAii QN OF POTENT PL aAV I SGS \Ita 1 fl
230
-----------------------------------------------------------------------------------------------------------------
D!soxin
P1race1:, PJK!r Str'!et F!tJor. School tJft ice Fillng dni iJrll Coo1er
..... lQ cable lama :!esk cabi:1et per
-------------------------------------------------------------------------------------------------------------------
iOTAL SAVINGS
!BELSIUI'I -. !TAL'{) 54'% ::sx . !11l

.. ! )At m 141.
!FRA:lCE
-)
ITALY! 507. m m 31X ton m
. .,.
J'-!
!6ERI'IANY ITALYl m ::ox m zn 54 X

t, .. .,

1>%
!UK ->
!TAL'() b77. 167. m 237.

..... .,
lJ/ I,
m
1[7.
RELATIVE ADVANTAGE
rOR SUPPLIERS:
BELSIUI'I SBI
., .....
ox ox

Oi: ox
.,.,.
n
J%
.lh '-a
4.1'
FRANCE 2SI :tu 07. Ol bOX 07. I) X 2bi. 1U

SERI'IANY 401 MX 4X 07. on
t}I
04

IJ/ i)%
IJK 767. <157. sx m 2SX 21% 07.
sqi

1)%
POTENTIAL SAVHI6 AFTER
SAVINGS THRESHOLD
9UYIN6 FROI'I :
BELSIUI'I
'I :.a: ox ox 07. 04 o:

0%
'-'"
IJ'o
FRANCE 07. 1:07.
1)7. !)7,
97. Oi.
1)7,


SEiii'IANV ox !i4I O't
1)4
..
07. 07. 07. m
(J%
G4
lji(
97. 1107. ox 147. ox ox
t)7, i)Z
., . .,
,:,.j,. 07.
-----------------------------------------------------------------------------------------------------------------
IIAX SAYINGS 97. uox 07. lU 9% OX 07. 07. 367. 07.
-----------------------------------------------------------------------------------------------------------------
Source
.
Atkins Sur1ey .
Data
26/LQ/87
CALCULATION OF POTENTIAL SAYINGS !Italyl
Ceaent Opel Fiat YW Cardilc l-rlv Trans- Goods Telephone
Ascona Ducato Transp. 1/c. foraer -agon
TOTAL SAYINGS THRESHOLD
!BELSIUI'I -> ITALY!
!FRANCE -> ITAL'!l
!SERI'IANY -> iTALYl
!UK -> ITAUl
RELATIVE PRICE ADVANTAGE
FOR SUPPLIERS:
BELSIUI'I
FRANCE
GERMANY
UK
POTENTIAL SAYING AFTER
SAYINGS THRESHOLD WHEN
BUYING FROI'I :
BELSIIJI'I


IJK
IIAX SAYINGS
Source : Survey
Data
218%
1991
1611
277%
ox
07.
ox
ox
ox
ox
ox
ox
ox
6%
77.
oz
ax
::61
07.
2%
n
9I
OX
ox
OX
ax
87.
7I
9I
m
ox
4I
lOX
SI
ox
ox
01.
sx
ii
ii
bZ
ax
.... .,
1-.Jit
u
151
m
m

qz
l
C:"
vlo
m
m
401
m
SI
1)%
. 763 -
231
Appendix II (contd)
TABLE 11.2(e) - CALCULATION OF POTENTIAL SAVINGS FACTORS (UK)
764 -
- ... '
CF
232
---------------------------------------------------------------------------------------------------------------------
.

;wl''ai

c : i
:r
---------------------------------------------------------------------------------------------------------------------


:rH ..

-.
'"'\
'"

:r:
. .,
'"
!.!f-..:
-
J>
.. !
. :.w; : l%

...
....
tr:
,.
- -
Jl . :jiJ ' .J .. :s !Ia
_IJ,.

.,.,
li:: t::7. m
.. ,


-,
--.
.....
""'
{ ::.;Lt
-. :Jr
...
:at. .J6::
.... (. u
)i.
. ,.

. Jl}!a
_..,.,.,,
.1..
:;EUTiVE


...
.a ..
,,u
'.lit
..
IJ,.
.. ,,.,
.jiJ' ijO':
ll

,.,.,

07. 19! i)l;:
i)7,
-.
'}I,

1)7. 1)7.

.)7, :l% iCO!
,.,
') ...
ITAL'f

0h

)7.


,f"
Vim


=,
""

0'. 01 2!\ n

J., .:.
:-RANCE rJ7. OY.

(1
n 15!. lOG/.
,.
'l.'l
n
.)X
04 !)%
M.,.

n t,./',
07.
')X
m:
!)4
l7.
I)!: 1)1)7.
0%
---------------------------------------------------------------------------------------------------------------------
i'!AX
jl !)7. 1)7,
07. m
1)1. 1)7. 07.

QF SAYINGS (UKJ
--------------------------------------------------------------------------------------------------------------------
trins. I teleahone aver!ge van

i:.tRES!-ICL.il
t3ELSiwl'! :Jr)
7h

..... ..
n '" n h JI. .'h
-' iJn
i7. m

S7.

..
Jn J!. Jh
(6ERMANV
_,
JKl

.. ,
"""
.,.
::

L"
..
57. .11.
-"
: Jh .J!

-. !JKJ 11: SoX
., . .,
57. l%
.,,
37.

i.Jt.
,,,
J!a



EELSIU!'!
,.
,)%
!bi: 1Cl 'P" '"
......
.. ;, .u .
' .
i.vh

07. ')4 44i.
m
"'
)\ .:., .. /, 1
l/a
3ER!'!ANY
..
..

.. ..
.
'"
........ 'J .. l.J!. -..:It },
nLY
4'"
...

,)7, J/, .;!.

3AV!NGS il!RESHOLD
9!JY!1lS
29l
n
04



,.
..
Jl h

aJ:. .;. .. , ..
miiCE m
t)7. .n lh

23
.)f. . .:.;.
SEii:MANY
,., ,.,
j)
s::
, .. ,u f
).'. .!.
'"
VJ. _:.,
!'nLY '
.,.
L
,,., ,.
,., ,.
.. .:.:.
,,
..... 1!. '.r'l lfll 1
.ril
---------------------------------------------------------------------------------------------------------------------

,.

I .... ...


I'
, .
'""''
.:."'

- 765 -
233
------------------------------------------------------------------------------------------------------------------



laoo
r t
1
.!0r
t:1be
sc:1:ol


:itnr.et
------------------------------------------------------------------------------------------------------------------
SA"mSS THRESHOLD
SAVING
3AVINGS THRESHOLD
9t:YIN6
3EL511Jt1

3E51'!AN'{
!i.iLY

3aurce : Survey
Data
26/10/87
lH4
129Y.
135::
:88!

Oi.
'n
!)f.
07.
QY.
01.
(\k


i'18Y.

...
)''
''
,.
I_. I,
0%
l)f.
..
/h
')i.

<)7.
CALCULATION OF POTENTIAL SAVINGS (UKl
Ceun t Joel



!') ,
48%
1"'''
L.:.

7 .. '1
s:i.

,)f.


.)'.
547.
,.
\)f,
07.

n
,)l
, .. ,
!).',
Oh
()7,
07.
1)7.
,,.,
J ...
1):
1)7. ')i.
o
.
i)i.
'lil ':ir1UC
Due a to 7rinsp.


lt)'\

e ... ,
I
i18't
a"'
...

..
1),.

:n
.)i.

0'.
'"
n
Jl.
"
)7. i)'(
,.
r''{ 1}/,
tl7. 07,
)Y.

J/C, +.orl!er

e"'"'

ofo.

1'(

. .

..
!o
1'
''


G!J,JdS


,,.,,

.. ,.,
... l'
.. ,
I} I
'"
!o
.
Oi.




..
l.

---------------------------------------------------------------------------------------------------------
70iAL SAVINGS THRESHOLD
;EELSIUII

ilK) 7n Si.
..
467.
... ,
21": \) '
,.,



iJKl

7'!,
!67. 17. 61.


''
I
iaERI!ANY
_,
UKl 139'1.
,.,
3%
p
r
... ir"t"
.:
Oh
-"
!'H .''1
\lTALY

IJKJ zm 8%
... ...
Sn
c;

..
'='"'"
tL i. ...
'
'
.... ,,
PRICE
FlJR SUPPLiERS:
3ELSili:1

J4
. .,
. n :1
11'(
..
!.:. . .
....

..

)7.
,.
a;

.... 1}!11 '!I ,.J
5ERI'!ANY


1
}f.
..
'" .'. . ... jJ,
FALY

.,.
')i. )7.
..
j7.

.
'.J .J:. .Jf Jlo
SAVING AFTER
SAVINGS THRESHOLD liHEN
3UY!NS FROI'I
3ELSIUII )X )% .n
.)'(
l%
.. }'(
...
FliANCE
i}\
,,.

, ..
6ERI'IAIIY Ji. "'
)'<
)"


..
'.''I
'"
-''
P'ALY )7. l)'f.
li. '"
)7. (ii.

..
J!. lot',
''' ''t
--------------------------------------------------------------------------------------------------------
SourC2 :
Jata
..
''
)
.
'
..
t.:.
,,.
IJ't
' ..
.' '
...







w
.'it
ti'
.....
''
\)t
766 -
234
TABLE 11.3 - CALCULATION OF POTENTIAL SAVINGS - SUMMARY
---------------------------------------------------------------------------------------------------------------------


tll:

!.i!."Ei

:.1::r :ai:
;nr;:iJc:r !:i
---------------------------------------------------------------------------------------------------------------------
-

..... "' ..
.. .. ...

i7.1L'I

: Jata




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: 3EUC Data
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- 767 -
235
Appendix II (contd)
TABLE 11.4 - HERMES MODEL FACTORS
- 769 -
17/11/87
CHANGE iN DUE TO PRICE EFECT
BELG!IJi'l 3ERI!ANY ITALY U.K.
A : AGRICULTURE Q.Oi. 1),1)7. i).l)%
0.07.
E : FUEL POWER 0.0% 0.0% 0 . v.9I
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f). 1)7.
a.a7. 1).1)7. 7.H
K : EGUIP"ENT GOODS 4.:% o.n " 4tJ/,
., ..
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C : CONSU"PTION GOODS 9.8% 0.27. 0. 47. 0.27.
B : BUILDING AND 1.07. 1.0% 1.0% t )Z 1.0%
z : TRANSPORT AND COMMUNICATION o.ox 0.07. 0,)7. 0.07. o.ot
L : OTHER MARKET SERVICE!) o.ox 0.5% o.n
--------------------------------------------------------------------------------
17/11187
Fonula : Pric! Effectl /SUI!! Public Purchases!
-FOR EACH MACROSECTORAL BRANCH
CHANGE IN PRICE DUE TO CO"PET!TION
BELGIUM FRANCE GER"ANY ITALY U.K.

A : AGRICULTURE
E : FUEL AND POWER
Q : INTER"EDIATE GOODS
K : SOODS
C : CONSU"PTION GOODS
8 : BUILDING AND CONSTRUc:TION
Z : TRANSPORT AND COM"UNICATION
l : OTHER IIARKET SERY I CEE;
17/11/87
: AGRICULTURE
E : FUEL AND POWER
a : INTERIIEDIATE GOODS
K : EGUIPIIENT BOODS
C : CONSU"PTIQN GOODS
B : BUILDING AND CONSTRUCTION
Z : TRANSPORT AND COIIIIUN!CATION
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Foraula : SU"ICoapetition Effectl/SU"IPublic Furchas!sl
-FOR EACH MACROSECTORAL BRANCH
CHANGE IN PRICE DUE iO RESTRUCTURING EFFECT
BELSIU" FRANCE GERIIANY !mY U.K.
0.07. !),07. 1).07. 1).07.
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-FOR EACH MACROSECTORAL
236
- 770 -
17111! 9i
: AGRICULTURE
E : 'UEL AND
l : iNTERMEu!ATE 30005
K : 600DS
C : CONSUMPTiON GOODS
9 : BUILDING AND CONSTRUCTION
l : COIIMUNICATION
L : OTHER SERVICES
17111187
A : AGRICULTURE
E : FUEL AND POWER
Q : INTERMEDIATE GOODS
K : :'llJ!P11E!lT SnDDS
C : CONSUIIPT!ON GOODS
B : BUILDING A"D CONSTRUCTION
Z : TRANSPORT AND COIIMUNICATION
L : OTHER SERVICES
17!11/87
IN PRICE 237
GERMANY U.K.
:) 't)7. 0.1)7. ).07. o.n
t},i)7.
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CHANGE IN PENETRATION
BELG I IJII FRANCE GERHANY ITALY IJ.K
0.07. 0.07. 0.07. 0.07. O.OY.
0.07. 0.07. 26.37. 0.07. 3.67.
14.4X 3.b7. 9.17. 24.87. 11.27.
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0.07. 5.37. 5.67. 3.97.
F'or'lula : SUII!Public Purchases ' Ioort Penetrationlt5U!1!Public ?urchasesl
-FOR EACH MACROSECTORAL BRANCH
. 771 -
III.O
III.l
III.2
III.3
III.4
III.5
III.6
III .7
III. a
III.9
APPENDIX I II
THE CASE STUDY
INDUSTRIES IN THE USA
Introduction
Coal
Boilers
TUI'"bi ne Generators
Lot:omot i ves
Mai nframe Computers
CPE Switching Equipment
Te'lephones
Lasers
Tatriff Rates
238
Page
239
239
241
245
249
253
257
266
271
274
773-
239
Appendix III (cont'd)
III.O Introduction
For each of the case study industries a comparison has been made
between the industry structures and competitiveness in USA and
Europe, to indicate:
* whether the large, relatively open, US market gives US firms a
competitive advantage
* whether the US industry is a pattern for the future
development of EC industries in an open internal market.
This appendix describes the US industries. It is based on fieldwork
and deskwork in the USA during August 1987. The conclusions are
drawn from interviews with US government particu1ar1y in
the Department of Commerce, and the publications listed in the
bibliography.
III .1 Coal
I II. 1.1 Industry structure
The USA is world leader in the production of steam coal, accounting
for 25% of the market. Output has increased at an average annual
rate of 3.1% since 1972, and presently stands at lOlOm tonnes.
Production is carried out by more than 3000 companies, operating
over 4,700 mines. Despite this, the industry displays a marked
level of concentration. Only 159 mines are capable of producing
over 7m tonnes per annum, and the largest 10 companies account for
33% of total output. Although coal is mined in 27 States, three
account for 50% of the production.
Electric utilities consume 85% of all coal mined in the US. About
8% (mostly metallurgical coal at present) is exported, mainly to
Western Europe. Import penetration stands at 0.2% of consumption.
- 774 -
240
Appendix III (contd)
III.l.2 Competitiveness
The US coal mining industry is highly competitive, for the following
reasons:
* Geological conditions (some 60% of production is surface
mined) allow high levels of mechanisation.
* Vast reserves enable producers to avoid mining difficult
seams.
* Productivity is high by international standards, and has
increased steadily over the past decade. Capacity utilisation
stands at 90%.
* Transportation facilities are modern and efficient; labour
relations are stable.
* Profitability has been maintained despite falling real prices
(the average f. o. b. price was $27 /tonne between 1980 and
1986).
* US producers can expect the domestic demandto grow at 2% per
annum to the year 2000.
* Exposure to international competition, and aggressive
competition among US producers for utilities contracts.
Projections up to 1995 indicate that US mine prices will be
generally superior to South African, Australian and Colombian coal
by at least $6/tonne in the domestic market. The US is vulnerable
to competition only to sales from Colombia to coastal utilities in
the South East and Gulf. For this reason, legislation has been
proposed to set a $8/tonne tariff on Colombian coal imports.
775 -
241
Appendix III (cont'd)
In export markets, the US is not price competitive and has lost
market share steadily. However, it retains a high volume of sales
because of concerns among purchasers about the re 1 i ability of
supply, their desire for supply diversification, and the high
quality of US coals.
III.l.3 Impact of internal market factors
The fact that the US market is 1 arge and not fragmented gives no
significant economies of scale to the coal industry, where markets
are restricted by transport costs, and scale is determined by
geological factors. The US industry has many small firms, and is
highly competitive.
II I. 2 Boilers
I I I. 2.1 Industry structure
Since the mid 1970's, orders for conventional and nuclear boilers
have declined markedly in the US. Sales have fallen from an average
of 28,000mw p.a in the early 1970s to 13,000mw p.a in the 1980's.
There were few orders placed in 1985 and 1986, and demand is
expected to grow at only 1. 5% per annum to 1995 for convention a 1
boilers and 3% per annum for nuclear systems.
As a result, all manufacturers are operating at minimum levels
(below 20% capacity) and subsisting largely on maintenance and
repair work. There are four manufacturers of conventional boilers:
* Combustion Engineering
Combustion Engineering Power Systems Group (CE) supplies
equipment and services for both conventional and nuclear steam
generating systems for electric utilities and industry. It has
a network of 46 li V3Pes and associated companies in 30
- 776 -
242
Appendix III (cont'd)
countries, as we 11 as 20 manufacturing p 1 ants and 6 R&D
facilities in the USA and Canada. Although CE leads the US
market (with a 40% share), a levelling out of turnover
figures persuaded CE to embark on a major restructuring
programme in 1983, involving consolidation of manufacturing
facilities and acquisition of companies in related but
higher-value markets. Investment in R&D has also been
increased to exploit new technologies.
* Babcock and Wilcox
Babcock and Wilcox is a subsidiary of McDermott International
Power Generation Systems and Equipment Division. It
manufactures complete fossil fuel boilers, nuclear steam
supply systems, and nuclaar fuel assemblies for the eiectric
utility industry. Most plants are owned by Babcock and Wilcox
and are located in the US with the exception of one in
Ontario. The company is moving increasingly into higher value
components (e.g. computerised boiler management systems) and
new technologies to improve sales in the retrofit market.
Babcock has a 35% share of the US market.
* Foster Wheeler
Foster Wheeler Energy Equipment primarily designs and
fabricates steam generators and condensers. Manufacturing
plants are located in New York and Ontario. The company has a
20% share of the domestic market.
* Riley Stoker
Manufactures conventional boilers, taking a 5% share of the
domestic market.
- 777 -
243
Appendix III (cont'd)
Nuclear steam supply systems are produced by Babcock and Wilcox, CE,
and also General Electric and Westinghouse. CE initially
participated in the nuclear power market as a supplier of major
components to both General Electric and Westinghouse, but later
entered the market with a complete system of their own design
primarily for the US market.
III.2.2 Competitiveness
The competitiveness of US boilermakers vis-a-vis EC suppliers is
difficult to det1ermine for the following reasons:
* there is no import penetration of the US boiler market since
all three licensors of boiler technology manufacture in the US
* although the market for new boilers in the US has been
depressed for many years, and manufacturers are operating at
around 10% c ~ c i t y for complete units, the three main
suppliers are recording improving profit rates in excess of
10% largely due to expansion of higher-value business lines
and the buoyancy of the domestic maintenance, retrofit and
upgrading market
* US boi 1 ermakers export a much sma 11 er percentage of their
output than their EC competitors (averaging 15% over the last
decade and declining), but the strong domestic market for
maintenance and refurbishment together with uncompetitive
export credit packages have weakened the incentive to pursue
export markets as aggressively as the competition.
US industry specialists, however, suggest the following:
* the large market enjoyed by US boilermakers (see Table
I I I. 2.1) has provided the resources for them to maintain a
world lead in both boiler and production technology. Although
- 778 -
244
Appendix III (cont'd)
the three main US suppliers typically allocate 1 to 2% of
revenues to R&D and 1% to capital investment (less than most
EC manufacturers) these are enough in absolute terms to retain
a lead over Europe where there is much duplication of effort.
Particular attention has been directed towards, for example,
fluidised bed combustion and measures to improve labour
productivity (given the relatively high labour rates obtaining
in the US)
TABLE III.2.1 -COMPARISON OF US AND EC BOILER PRODUCTION
Utility boiler sales (MW : 1984)
No. of major manufacturers
(including nuclear pressure vessels)
Source: US Department of Commerce
USA
13,000
6
EEC
12,000
15
* although there are some economies of scale in production, the
US advantage in this respect has eroded as domestic orders
declined. Over-capacity is now worse in the US than in EC,
and this is a major drain on resources. The current programme
of consolidation of manufacturing facilities should restore
the US edge
* US equipment is believed to be both more reliable and
efficient than the competition, primarily because of new
technology.
- 779 -
245
Appendix III (contd)
III.2.3 Impact of internal market factors
The size of thE! i nterna 1 market gives some economies of sea 1 e in
boilermaking, particularly in R D ~ but this is not the key factor in
US firms performance. Greater competition between boi 1 ermakers,
compared to the protected and fragmented EC industry, has led to
greater efficiency and technical progress.
111.3 Turbine Generators
III.3.1 Industry structure
Most US power is generated by private investor-owned companies that
account for 77% of the nations generating capacity. Federal
installations (mostiy linked to irrigation projects) opercte only
10% of US capacity. A further 8% is generated by municipality-owned
companies; most municipality utilities now perform only the
distribution function. The remaining 5% is generated by
co-operatives, many established and financed by the Rural Electric
Administration. Despite the large number of utilities (648 in
1986), the market for large turbine-generator sets is quite
concentrated. Of 10,475 generating units, only 407 (4%) are above
500 mw. Utilities generally procure equipment to identical
specifications, and do not place restrictions on non-US suppliers,
so the market is both open and uniform.
The US has the largest electricity generating system in the world.
The size of this network
opportunity to lead the
production of electric
has given US equipment manufacturers the
world in the design, development and
power generating equipment, including
turbine-generator sets. A comparison of markets, generating
capacity, production capacity and sales for turbine-generators
between the USA and the EC is given in Table III.3.1.
- 780 -
246
Appendix III (contd)
TABLE III.3.1 -USA AND EC PRODUCTION OF TURBINE GENERATOR SETS
USA EC World
(est)
Generating capacity 666 360 2,000
(GW : 1984)
Additions to capacity 23 12 100
(GW: 1985-1990)
Production capacity: 38 60 150
all power generating
equipment (GW : 1984)
Sales turbine-generators 14 9 30
(GW : annual average 1980-85)
No. manufacturers 2 10 na
Source: US Department of Commerce
In common with Europe, the US domestic market for turbine generators
has deteriorated since the mid-1970s. US generation of electricity
grew 10% per annum between 1960 and 1975, but only 1 . 5% per annum
between 1980 and 1986. Projected growth between 1986 and 1995 is 2%
per annum. As a result, shipments of turbine generator sets fell
from 51,872 MW in 1972 to 12,920 MW in 1983 n ~ 7,500 in 1985. This
has had the following implications:
* restructuring and consolidation by US manufacturers
* increased dependence on exports where margins are lower.
Exports rose from 2% of sales in 1972 to 17% in 1983, although
this is still low compared to European firms.
There have been only two US supp 1 i ers of turbine-generator sets
since the departure of Allis Chalmers from this sector of the
industry in the 1960s, namely:
- 781 -
247
Appendix III (cont'd)
* General Electric (GE)
GE has 45% of the US turbine-generator market. It is we 11
over twice the size of each of its major EC competitors. GE
has recently invested heavily in measures to improve
productivity and efficiency, in the rationalisation of
manufacturing sites, and in the development of new power
generating technologies. In addition, GE has sold its power
transformer business to Westinghouse.
* Westinghouse
Westinghouse has 40% of the US turbine-generator market. Like
GE, Westinghouse has consolidated its turbine-generator
business (recently l ~ s i n g a facility at Pittsburgh) ar.d
diversified into a variety of sectors, strengthening its R&D
capability.
III.3.2 Competitiveness
A comparison of US and EC suppliers of turbine-generators sets leads
to the following conclusions:
* profit margins for US suppliers average 9% against 3 to 4% for
EC manufacturers
* fixed costs per unit of production are thought to be lower for
US suppliers given the size of their manufacturing facilities.
GE, for E!xample, carries out all its steam turbine generator
production on one site following recent rationalisation
* US suppliers R&D expenditure represents 5 to 6% of total
revenue; the average for EC suppliers is 2 to 3%, which is
much smaller in absolute amount.
- 782 -
248
Appendix III (cont'd)
* the US market is fairly open to foreign suppliers, subject to
a 7.5% tariff, but import penetration is low (around 5%).
Only one large import order has been placed (with
Brown-Boveri) in recent years. The US maintains a 3:1 trade
surplus, albeit a declining share of the world market
* a US Department of Energy study compared US and imported
turbine generators, and found US equipment more reliable and
cheaper to run.
The competitiveness of US suppliers is thought to arise from certain
scale economies. Their dominance of the large US market has enabled
GE and Westinghouse to maintain profitability, initially through
installation of power units and latterly through maintenance and
refurbishment; anrl to invest in the R&D necessary to maintain a
technological lead, and the capital investment to remain low-cost
producers. Both companies' membership of larger engineering groups
has accorded further benefits in, for example, the sharing of R&D
facilities and the use of corporate resources in implementing
restructuring programmes.
This assessment is, at first sight, contradicted by the poor
performance of US manufacturers in markets outside Japan and Western
Europe. However, this can be explained, inter alia, by:
* non-competitive Eximbank financing compared to lower foreign
interest rates and mixed credits. The availability of
concessionary finance to Japanese manufacturers has persuaded
Westinghouse to sign a production sharing agreement with
Mitsubishi for the manufacture of turbine generators below
250 MW for non-US markets
- 783 -
249
Appendix III (contd)
* the high value of the US dollar
* the existence of the International Electrical Association. It
is thoUight that this carte 1 of European and Japanese
manufacturers enables its members to keep bid costs low by
allocating markets
* government subsidies to European manufacturers
* anti-trust legislation prohibiting collusion between GE and
Westinghouse in export markets (their domestic market-fixing
arrangement was broken in the 1960s).
III.3.3 Impact of internal market factors
There are quite clear economies of scale for the US turbine
generator manufacturers, with only two firms and a larger market and
higher capacity utilisation than EC firms.
111.4 Locomotives
III.4.1 Industry structure
The US railroad industry provides four distinct and separate
services:
* Freight haulage, freight haulage is carried out by
companies, of which 32 are currently classified
(revenues in excess of $50 billion), 26 Class II,
over 400
C 1 ass I
and 375
Class III railroads (including train operators, switching and
terminal companies). Class I carriers account for 95% of the
freight tonnage handled by the industry. All operators are
privatel)' owned; the federal governments interest in Conrail
was sold off in 1985. The industry is still supervised by the
Interstate Commerce Commission; but since 1980 most freight
- 784 -
250
Appendix III (contd)
rates have been deregu 1 a ted. This has created much more
competitive conditions, and accelerated the rate of
consolidation through mergers. The seven largest railroads
now account for 80% of total rail revenues.
* Inter-city Passenger Services are provided by AMTRAK which was
set up in 1970 by the federal government and is 50%
state-financed.
* Conmuter services have been con so 1 i dated into region a 1
operating authorities funded by local government and the
communities served. Federal involvement in commuter services
through Conrail ended in 1982.
* Urban mass transit services are provided by 1ocal authorities
with federal financial assistance. Historically, 80% of all
transit capital improvements has been made with federal funds.
The market for equipment manufacturers in the US is thus very
different from Europe; the level of public sector involvement is
much lower and the number of entities providing services much
higher.
There are only two suppliers of electric locomotives:
* General Motors
GM is a manufacturer of both diesel-electric and electric
locomotives. It has licencing agreements in Australia, Spain,
Sweden, Yugos 1 a vi a, Germany ( Thyssen-Hensche 1 ) , Brazi 1 and
Korea. The company is world 1 eader in the production of
diesel locomotives, controlling 60% of the market.
- nos -
251
Appendix III (cont'd)
* General Electric
GE also manufactures diesel-electric and electric locomotives.
It has licencing agreements in Australia, Brazil, South Africa
and Germany (Krupp).
III.4.2 Competitivess
GE and GM are world leaders in the manufacture of diesel-electric
locomotives, particularly for freight-haulage applications. They
completely dominate the market in the US, where the use of common
specifications and systems between rail roads and deregulation has
created a large and growing rail-haulage industry. GE and GM have
therefore enjoyed the economies of series production, despite
gradual deterioratior. in the level of capacity utilisation (which is
around 50% cUJrrently). Their advantage in this respect over the
European competition is evident from Table III.4.1.
TABLE III.4.1.-COMPARISON OF THE US AND EC LOCOMOTIVE INDUSTRY
No. of locomotives in service (1986)
Domestic orders of locomotives (1986)
No. of major manufacturers
Source: Association of American Railroads.
US EC
24,881
540
2
20' 174
84
10
GM and GE machines are thought to be leaders in terms of cost,
reliability and fuel efficiency.
- 786 -
252
Appendix III (cont
1
d)
The picture is very different for electric locomotives. The major
market for such machines lies in passenger rail (both inter-city and
commuter), and here the US suppliers have major disadvantages
vis-a-vis their EC competitors:
* demand has declined steadily for decades, and is not thought
likely to improve except for urban mass transit services. The
European passager rail industry is much larger. AmTrak is not
expected to place any orders for several years
* public sector financial assistance is aimed at maintaining
essential services, and is not sufficient, as in Europe, to
support the development of new locomotives.
As a result, GM and GC are not especially compet"itive in this
segment of the market. They lag significantly, particularly in
relation to Alsthom, in electronic componentry. However, their
machines are cheap and reliable, so both companies sustain sales to
less sophisticated export markets. For the same reason, import
penetration is zero; currently there is no market in the US for the
high speed, high performance electric locomotives manufactured in
Europe.
III.4.3 Impact of internal market factors
Like turbine generators, the US locomotive manufacturers seem to
benefit from considerable economies of scale from the large, uniform
and competitive US market. Although there are on 1 y two
manufacturers there is probably more effective competition than
between manufacturers in most EC countries, and this competitive
environment may be more important than the economies of scale.
'87 -
253
Appendix III (contd)
111.5 Mainframe Computers
III.5.l Industry structure
US sales of mai nframe computers were worth $24.8 billion in 1986.
The leading SUIPpliers and their market shares are shown in Table
III.5.l.
TABLE 111.5.1 -US MAINFRAME COMPUTER MANUFACTURERS
Company
!iBM
DI::C
SIPerry )
Burroughs)
CDC
NCR
Honeywell
Cray
Amdahl
Uni:;ys
% of US
Market
62 01
9.7
7.3
6.4
5.5
5.0
2.0
1.0
l.O
Source: US Department of Commerce
The industry has undergone some measure of rationalisation in recent
years, following a slowdown in market growth. Mainframe sales have
grown at 5% per annum si nee 1980 against 20% per annum for the
industry as a whole. Tlhe Sperry-Burroughs ( Uni sys) merger was one
product of this (Sperry became a majority owned subsidiary of
Burroughs in 1986) . Specialisation in product lines is another;
Burroughs focuses on the banking market, Sperry on airlines and NCR
on retail applications. Only IBM and CDC are continuing to produce
the full range of rna i nframe s.
Cray Research and CDC are the only two companies producing
supercomputers in the USA. Cray has 70% of that market, and almost
total dominance of the public sector segment. Supercomputers
- 788 -
254
Appendix III (cont'd)
account for only 3% of total mainframe production, but sales have
been rising rapidly. Cray, for example, has grown very rapidly each
year since commencing operations in 1972.
between 1985 and 1986.
Sa 1 es increased 57%
Pub 1 i c sector sa 1 es account for 5% of production in the computer
industry as a whole, but around 30% for mainframes. Sperry, for
example, sells 29% by value of its output to NASA and the military,
and a further 10% to other government agencies. Supercomputer
manufacturers are even more dependent on public sector business.
Some 50% of Cray s revenues has been provided by government and
university customers.
III.5.2 Competitiveness
The huge US lead over EC manufacturers in the production of
mainframes is evident from Table III.5.2.
Thus, while the EC comprises nearly 25% of the world market,
indigenous manufacturers supply only 8% of sales. The US lead is
even more pronounced in supercomputers, where its manufacturers
control 90% of the world market, and face competition only from the
Japanese. Most important of all, US manufacturers have virtually no
competition from the EC in terms of hardware technology. Of the
four 'indigenous manufacturers in the EC, only Nixdorf (and very
recently, Siemens) use homegrown technology.
The only real competition to US mainframe manufacturers comes from
the Japanese, principally Fujitsu and NEC. The Japanese have a
small share of the US mainframe market through Honeywell-Bull (which
uses NEC technology) and Amdahl (Fujitsu). The technology flow from
the USA to Japan has effectively been reversed, even in
supercomputers (where Fujitsu and Hitachi now claim a technological
lead over Cray and CDC). Import penetration in mainframes stands
well below the industry average for the US (20%), but the situation
is expected to deteriorate.
-
255
Appendix III (cont'd)
TABLE 111.5.2 - COMPARISON OF THE US AND EC MAINFRAME
COMPUTER INDUSTRY
I
us EC
I
Market size (US$ billion)
I
15.6 8.2
share of world market
I
46% 24%
I
Production (US$ billion)
I
24.8 2.8
share of world! market
I
73% 8%
I
No. manufacturers
. I
9 4
I
I
I
I
I
I
I
I
(exc IBM) I
I I
Source: US Department of Commerce
WORLD
34.0
100%
34.0
100%
Note: The world market for all computer equipment is estimated at
$108.3 billion in 1985 and $150 billion in 1987. Mainframes
account for- about 22% of this total.
Vis-a-vis the European competition, however, the US has substantial
advantages in:
* the possession of indigenous technology
* access to a larger domestic market
* the size of individual companies, giving most a lead in the
development of manufacturing systems and computer technology.
IBM's ability to over $3.5 billion annually to R&D
(more than all manufacturers combined) is unrivalled.
Companies such as Cray and Sperry devote 15% and 18% of
revenues respectively to R&D. European manufacturers cannot
match such expenditures, and survive only by importing
technology 'off-the-shelf' from the Japanese
- 790 -
256
Appendix III (cont'd)
* private sector funding of R&D; few European customers are
large enough to subsidise the development of computer systems
by their suppliers, whereas in the USA this is relatively
common. Sperry, for example, sources 52% of its R&D budget
from private sector clients.
* very large Department of Defence funding of research projects
which have commercial spin-off.
On the other hand, US manufacturers face some disadvantages compared
with EC companies:
* preferential public sector procurement practices in Europe and
Japan. The US has recently negotiated an agreement with the
Japanese allowing their manufacturers a reasonable chance of
winning business in supercomputers, but access to public
sector markets remains limited. Offshore manufacturing in
major export markets (IBM's strategy) has been quite
successful in breaking down these barriers, and IBM has a
strong market share in all countries, but still believes
preference is given to indigenous firms.
* anti-trust legislation. Only recently has interpretation of
anti-trust legislation been relaxed to allow the formation of
R&D consortia, such as the Microelectronic and Computer
Technology Corporation set up in 1983. Led by CDC, this
group of 21 computer and semiconductor companies attempts to
exploit the economies of scale and risk minimisation that
collective efforts in R&D may provide. Collaborative research
ventures in Europe are more common.
~ -
257
Appendix III (cont'd)
III.5.3 Impact of internal market factors
US finils benefit from lcirge R&D expenditure which is focused on
particular markE!ts because of sp.ecialisation of firms. European
firms research is duplicated, with little cross-fertilisation.
This, rather than economies of scale in manufacture and marketing,
seems to be the key, although IBM's absolute size gives it enormous
market power.
111.6 Public Exchange Switching Equipment
III.6.1 Industry structure
The US market for central public exchange switches was worth
approximately $3.4 billion in 1985. The major suppliers are
identified in Table III.6.1.
TABLE III .6.1 - SUPPLIERS OF SWITCHES TO THE USA, 1984
I
Tota'l Lines Digital Lines Analogue Linel
Shi pped Shipments Shipments
I
(mi '11 ions) (millions) (millions)
I
I
I
AT&T 4.6 2.5 2. 1
I
Northern Telecom 3.2 3. 1
I
GTE 1.6 1.6 0.04
I
Others 0.43 0.48 0.01
I
I
I
9.83 7.68 2.15
I
I
Source: US Department of Commerce
AT&T clearly dominates t h ~ market overall (with a 47% market share),
but Northern Telecom leads in the digital area. The fourth largest
supplier is currently Stromberg-Carlson (now owned by Plessey),
- 792 -
258
Appendix III (contd)
which supplies only digital equipment, and accounts for about 3% of
the market. The digital switching market is expected to grow at 5
to 9% per annum.
The major suppliers activities may be summarised as follows:
* AT&T Technologies
AT&T Technologies (formerly Western Electric) produces seven
varieties of switches (the ESS family). The most advanced
product is 5-ESS, which incorporates the latest hardware
features and software capabilities, and now accounts for 50%
of sales.
AT&T retains privileged access to its own long
network market. However, since 1984 it has lost market share,
notably to Northern Telecom, because the Regional Bell
Operating Companies (RBOCs) were free to seek alternative
suppliers. However, recent reports indicate that the 5-ESS
switch has enabled AT&T to recapture the lead.
To offset the loss of its near monopoly status in the USA,
AT&T launched itself into European export markets. In
it set up a joint venture with Philips (to form APT), and in
1984 purchased a 25% stake in Olivetti.
Switches are manufactured in Dallas, Columbus and Oklahoma
City, and integrated circuits at another two facilities.
* Northern Telecom
Northern Telecom Inc. (NTI) is the US subsidiary of Northern
Telecom Limited (NT), Canada. Although NT manufactures all
types of telecommunications equipment, its strongest product
lines in the US market are of PBXs and public exchange
'93 -
259
Appendix III (cont'd)
switching. Following the acceptance of its first digital
switch, the in 1982 and its DMS-100 family in 1983, NT
has pushed sales of its digital technology.
Switches are manufactured at three facilities in North
Carolina. Production is at capacity levels. Some 80% of
sales are to US buyers.
* GTE Communications Inc.
GTE manufactures one digital switch - the GTD-5EAX - at North
Lake, Illinois. The switch was brought on line in 1982, and
sold initially to the GTE telephone companies. Sales to RBOCs
began in 1986 following evaluation by Bellcore in 1985. The
switch is also manufactured by GTE subsidiaries in Be1gium and
Italy. In 1986, GTE forged a 50:50 joint venture with
Siemens. This, together with growing acceptance of the
GTD-5EAX switch, is expected to turn around GTE's falling
share of the digital switching market.
* Stromberg-Carlson
Stromberg-Carlson is well established in the independent
TEL COs. In 1982, Plessey purchased the company to gain
instant US market share. Plessey originally planned to market
Stromberg's DCO digital switch and upgrade it with System X
tee hno 1 ogy and features, but in 1985 announced the phase-out
of DCO production at its facility in Florida.
However, attempts to se 11 System X to the RBOCs and common
carriers 111ere unsuccessful. Plessey has therefore decided to
continue with an upgraded DCO switch, and has become the third
supplier to the RBOC network (after AT&T and Northern
Telecom).
- 794 -
260
Appendix III (cont'd)
Other suppliers are:
* ITT Corporation
ITT has a small market share with its old System 1210 switch.
It was forced in 1985 to cance 1 its p 1 ans to deve 1 op a US
version of System 1240 (which it markets in Europe) because of
technological difficulties.
* DSC Communications Corporation
DSC has recently developed its DEX 5 digital switch, making
its first sale in 1985. Production is carried out at one
facility in Texas.
* Itec Inc and Rockwell International are both recent US
entrants to the market. Of the European suppliers the most
successful has been Ericsson which has made an impression on
the common carrier market. It has set up a joint venture with
a US company for marketing purposes, and imports its AXE-10
switches directly from Sweden. Siemens has sold its EWSD
switch to the RBOC market, and sales should be assisted by the
GTE link-up. Alcatel has also targeted the RBOC market for
its E-10 switch. It is unclear at this stage how the alliance
with ITT will affect its US strategy.
III.6.2 Competitiveness
The relative position of the world's suppliers of digital switches
can be gauged from Table III.6.2. Production by region is set out
in Table III.6.3.
'95 -
261
Appendix III (contd)
TABLE 111.6.2 - SALES OF DIGITAL SWITCHES
I
!Lines InstallediPositioniLines Insta1led1Positionl
I
by end 1985
I I
by end 1986
I I
Manufacturer
I
(millions)
I I
(mi 11 ions)
I I
I I I I
Alcatel 13.0
I
18.0
( 1 )
Northern
I
Telecom 11.1 2
I
15.5 2
AT&T 6.S 3
I
10. 1 3
Ericsson 4. 7' 4
I
7.9 4
GTE 3.8 5
I
5.0 6
NEC 2.9 6
I
5.9 5
ITT 1. s 7
I
Siemens 1.4 8
I
1.6 9
Plessey 1.1 9
I ) ( 2)
3.2 7
GEC 0. 7' 10 I )
Fujitsu
0.4 11
I
1.8 8
Other (3) 0. 51
I
3.0
Sources: US Department of Commerce; The Economist, 29/8/87
Notes: including ITT.
2 figure for 1985 includes Stromberg-Carlson; figure for
1986 refers to combined Plessey/GEC manufacture of
System X.
3 notably Philips, Italtel, Hitachi and Oki.
Although the picture is obscured by link-ups between countries
(notably, AT&T and Philips, Siemens and GTE, Alcatel and ITT), table
III.6.2 suggests that EC manufacturers are not significantly smaller
than their main competitors.
A different picture is obtained by comparing prices (see Table
111.6.4). This shows that none of the European manufacturers
domestic prices would be competitive in the US market. European
prices clearly reflect varying margins to cover development costs,
and the lack of competition. Increasing competition in the US
market has pushed prices down from between $200 and $250 per line in
1984 to $100 in 1987.
- 796 -
262
Appendix III (contd)
US manufacturers relatively poor sales performance cannot therefore
be exp 1 a i ned with reference to prices. They a 1 so appear to be
competitive in technology. Industry experts in the USA argue that
AT&Ts 5-ESS switch is the worlds most advanced, followed by
Ericsson and Siemens. Certainly, 5-ESS is more advanced than both
System X (which failed to sell in the US) and Alcatels E-10.
TABLE 111.6.3 - PRODUCTION OF DIGITAL SWITCHES BY REGION
Lines % of % of
Installed By Production Consumption
End 1986
Manufacturer (millions)
EC 23.2 32 16
us 16.7 23 40
Japanese 8. 7 12 9
Other 23.4 33 35
72.0 100 100
Sources: US Department of Commerce; The Economist, 29/8/87
Note: Counting Northern Telecom as Canadian
TABLE 111.6.4 - COMPARISON OF PRICES FOR DIGITAL SWITCHES
us
France
Belgium
UK .
Italy
Germany
$per line installed (1987)
(approx)
100
250
400
225
300
500
Sources: US Department of Commerce; WS Atkins interviews,
plus other sources (see footnote on page 152)
97 -
263
Appendix III (cont'd)
Accardi ng to US Department of Commerce reports, US manufacturers
have failed to lead the digital switching market because of:
* preferential procurement practices in Europe, Japan and even
(to some extent) Canada which have effectively excluded US
manufacturers from those markets, while all manufacturers have
had free access to the US market. Consequently:
the US 'enjoys' the
teleconmunication equipment
of any major OECID country
smallest trade surplus in
(as a percentage of production)
- the US suffers a net deficit with those same trading
partners
- over 50% of US exports are to developing countries, and 75%
to those plus the UK and Canada (the most liberal
telecorrmunications markets)
Both AT&T and GTE have clearly recognised that access to the
European market can only be obtai ned through alliances with
indigenous manufacturers.
* technological difficulties experienced by the ITT System 1240
switch, and the failure to adapt it to the US-market.
* higher levels of investment in the conversion to digital
switches in Europe than in the USA. European manufacturers
are presented with a smaller, but guaranteed, more predictable
and faster growing market than their US competitors.
* public s ~ ~ t o r funding of R&D in telecommunications.
Manufacturers in Europe have benefited greatly from
subsidisation of the development of indigenous technology.
British Telecom, for example, underwrote the development cost
of System X by about $700 million (out a.f a total cost of $1.4
billion). It is true, however, that the duplication of effort
- 798 -
264
Appendix III (cont
1
d)
in Europe has meant that the EC has spent nearly three times
as much on the development of digital exchanges as US
companies (i.e. $7 billion against $2.5 billion).
Interestingly, Table III.6.5 shows that those countries with highly
protected telecommunications markets have the strongest trade
balances.
TABLE 111.6.5 - TRADE BALANCES IN TELECOMMUNICATIONS EQUIPMENT
(1984)
Japan
Germany
France
Italy
UK
USA
Source: US Department of Commerce
$billion
+ 1.64
+ 0.53
+ 0.35
- 0.03
- 0.04
- 1.04
In an open market, US manufacturers would lead, at least initially,
on the basis of price and performance. It appears that EC
manufacturers cannot meet US market prices unless exports are sold
at marginal cost, or subsidised by domestic sales. Currently, they
account for less than 8% of the US market. However, the
competitiveness of US manufacturers will be steadily eroded unless
they maintain a technological lead.
Competition in technology will focus on software. In a digital
switch, software controls the signalling, processing, and routing
functions, and monitors maintenance problems. Increased emphasis is
being p 1 aced on software deve 1 opment as networks are converted to
I SON systems. Software determines the type of enhanced features
99 -
265
Appendix III (cont'd)
available in a network., a factor which will be increasingly
important to operators. Public sector subsidisation of R&D in
Europe could give EC manufacturers an edge in this respect.
Market share will be important because in the public switching
equipment industry, the size of a firm's actual or potential market
and its ability to sustain world-class competitive standing are
closely related. Economies of scale arise in production costs, in
marketing and maintenance services, and R&D. Conversion to digital
exchanges is set to slow down by the 1990s, by which time the
industry will face over-ci:tpacity problems. It is generally expected
that the industr-y wi 11 then undergo a 'shake-out'. The alliances
and take-overs which hcive characterised the telecommunications
industry in recent years demonstrate that the acquisition of market
share is recognised as essential for survival. The future of the US
digital switches industryl, just as much as the EC industry, seems to
depend, therefore, on whether the major export markets in Europe and
Japan are opened to competition.
III.6.3 Impact of internal market factors
After their initial lead, it is not evident that US firms now have
any great advantage over European manufacturers of digital switching
equipment. Stal'ting later, with protected home markets, has given
European firms an advantage (the same applies to Japanese firms).
Although protect,ed by pub"lic purchasing policies EC firms have been
exposed to some degree to the cold shower of competition, since all
countries have brought in second suppliers.
The size of the US market and the fact that it started first, means
that deve 1 opment costs there have been amortised by vo 1 ume
production and prices are now very low. Europe has not yet
amortised development costs, but prices will fall.
- 800 -
266
Appendix III (cont'd)
III.7 Telephones
III.7.1 Industry Structure
The US teleconmunications market breaks down as shown in Table
III.7.1.
TABLE III.7.1 -BREAKDOWN OF US TELECOMMUNICATIONS MARKET BY TYPE OF
EQUIPMENT
I
I
I
I
I
I
I Public switching
I Other switching
I Customer equipment
I Transmission
I Other
Consumption
(US $ billion)
1984
2.75
1.28
12.80
7.02
1.15
%
11
5
51
28
5

1
I
I
,, wee: US Department of Comnerce
25.00 100
Tn 1986, the US market for customer equipment was worth $16
billion, of which telephone handsets accounted for $2.2 billion
(about 7% of the total equipment market).
Since deregulation in 1968, more than 2,000 companies have entered
the customer premises market to supply te 1 ephone handsets, key
systems, PBXs, modems, facsimile, intercom, dictation, answering
machines and mobile radiotelephones. The major suppliers of
telephones are AT&T, ITT and General Electric; many others have left
this sector of the market because of competition from Far East
manufacturers. In total, 17 US companies are active in the market.
01 -
267
Appendix III (cont'd)
I I I. 7. 2 The US te 1 econmun i cations network
The US teleconmunications network is radically different to those
operating in Europe. It is important therefore to sketch briefly
the present structure of the system and its hi story.
Prior to 1984, the public teleconmunications network in the US was a
near AT&T monopol:y. This was broken by the Justice Department in
1982; a Consent Decree obliged AT&T to divest itself of 22 wholly
owned Bell operating competni es. These companies were grouped into
7 Regional Bell Operating Companies (RBOCs), with responsibility for
providing within 164 'Local Access and Transport Areas
(LATAs) covering the country. The RBOCs were prohibited from
offering long-distance toll services between LATAs. Local telephone
services are a ho !)rovi ded by independent te 1 e!Jhone co1npan i es
(TELCOs), and those part by AT&T (Cincinatti Bell and Southern
New England Te 1 ephone- Comp<my), and GTE.
AT&T was also obliged to support the RBOCs through provision of
equipment and services (through Western Electric, now AT&T
Technologies), and technology (through Bell Laboratories). However,

the intention was that the RBOCs would be free. to make their own
procurement decisions, set their own specifications, and compete
with AT&T and others in thE! provision of long distance services, in
consultancy and equipml:!nt contracts, and ultimately in
manufacturing.
Long distance services are currently provided by:
* AT&T (which absorbed all the long distance services run by the
operating companies and controls 80% of the market)
*
the speci i:l l i sed conmon carriers : these have developed
national (tandem-switched) networks to offer both public and
private long distancE! services. MCI and GTE/Sprint are by far
- 802 -
268
Appendix III (cont'd)
the largest, with 9% of the total long distance market
(followed by US Telecom and Western Union), but more than 50
companies are active in the field. Many of these are
rese llers, leasing 1 arge quantities of discounted services
from other long distance providers to resell to small
end-users
* 'va 1 ue-added carriers': these companies lease transmission
links from common carriers to offer 'packet-switching'
faci 1 ities which process information to improve transmission
efficiency. The largest companies offering this service are
Tymnet, GTE Telenet, Uninet and Graphnet.
In addition to the public network (PSTN) there is a significant
number of private networks ~ h i h mny be independer.t or connected to
the PSTN. They are common in federal government, the military and
large corporations.
A breakdown of revenues by carrier is provided in Table III.7.2.
TABLE III.7.2 - TELEPHONE OPERATING REVENUES BY TYPE OF
CARRIER (USA)
RBOC's
TELCO's
AT&T
(1986 : US $ billion)
Specialised Common Carriers
Value-added Carriers
Total
50.0
21.4
35.0
5.9
0.7
113
Source: US Department of Commerce, various publications
m3-
269
Appendix III (cont'd)
The major between this network and those operating in
Europe are:
* private ownership: public sector participation in the US is
confined to some of the sma 11 TELCOs
* competition in the provision of services: in 1986, the RBOCs
completed developments on their systems to allow equal access
to all long-distance carriers. AT&T'S privileged access to
RBOC networks has therefore disappeared. The degree of choice
available to the consumer is thus much greater in the US than
in Europe
* regu 1 a tory framework: the US telecommunications equipment
market was largely deregulated in 1962. Customer p:--<=mises
equipment must still be approved by the Federal Communications
Co11111issio11, but the testing may be carried out by independent
laboratories and the standards are performace orientated, and
set up to promote competition. Switching equipment is
normally submitted to Bellcore (formerly an arm of AT&T, but
now financed by the RBOCs) for testing. Thus, unlike Europe
there is no central PTT organisation responsible for
procuring, testing and approving equipment. This has
generated a much mc1re competitive equipment market
* competition in procurement: following the break-up of AT&T's
monopoly, RBOCs, as well as TELCOs and other carriers, are
free to procure equipment from any supplier. Prior to 1984,
Western Electric supplied 90% of the equipment used or re-sold
by (what became) the RBOCs. The proportion is now under 30%
* the size of the market: a 1 though the RBOC' s may soon deve 1 op
different equipment requirements, as their systems develop
independently of each other, thus fragmenting the market to
some degr,ee, dere1U 1 at ion and de-monopo 1 i sat ion have together
- 804 -
270
Appendix III (contd)
established a single and open US market. The installed base
consists of 23,000 switching offices and 118 million access
lines, which is 38% of the world market.
III.7.3 Competitiveness
Some 90% of telephones sold in the USA are manufactured in Japan and
other Far East countries. This compares with an average import
penetration of the US teleconmunications equipment market of 10%.
Almost none of the RBOCs retail AT&T telephones.
The main reason for this is that the price of telephone handsets is
determined to a large extent by labour costs which are considerably
lower in the Far East. AT&T has reacted to this by moving its
telephoile assembly plnnt from Louisiana to Singilpore. GE, on the
other hand, has invested in labour-saving techologies. Many other
firms have abandoned production, and concentrated on more
sophisticated products where they retain a technological advantage,
and where customers are concerned as much about performance as price
(for example, Psxs).
The better performance of EC manufacturers is due, in large measure,
to the control exercised by the PTTs over specifications, testing,
approval and procurement decisions.
III.7.4 Impact of internal market factors
Economies of scale in telephone manufacture have not in the past
been sufficiently important to overcome labour cost differences, so
the large US market has been no advantage to US manufacturers. Free
competition has, however, given US consumers access to cheap
imports. The fragmented and regulated EC market has protected high
cost local manufacturers. With new technology and deregulation,
however, EC manufacturers may be competitive (even with smaller
national markets than the USA).
805 -
271
Appendix III (contd)
I II 8 Lasers
I I !.8. 1 Industry structure
Lasers are manufactured by well over 1,000 companies in the US,
ranging from very big1 to the very small. Aside from the large
corporations such as Rockwell, manufacturers tend to specialise in
particular applications. It is thus convenient to discuss the
industry with to three end-use categories:
* Military clpplications
DOD funding of laser related R&D is thought to have been
at nearly 100% per annum in recent years. The
major beneficidties of lhis are well prime
to the mi 1 i tary such as Rockwe 11 and
Hewlett-Packard_, but sub-contracting to universities and
sma 11 er companies is common.
* Industria!, scientific, medical and co0111ercial applications
This segment of the market has experienced growth in excess of
15% per annum, and the rapid development of new applications.
These conditions have encouraged a high rate of entry to the
industry, notably by very small companies set up to exploit a
new techno 1 ogy or app 1 i cation. The 1 eve 1 of industria 1
concentration is thus very low, although a number of firms can
be identified as market leaders, e.g. Lumonics and
Spectre-Physics in industrial, medical and conunercial
applications, and Hewlett-Packard in scientific applications.
- 806 -
272
Appendix III (contd)
* Telecommunications applications
The market for semi-conductor laser diodes (used as
transmitters and repeaters in fibre optic cable) is increasing
at a rate of 30% per annum in the US. Some 400 firms
manufacture these devices or components, but the market is
dominated by the major telecommunications equipment suppliers:
AT&T Technologies (50% market share), Northern Telecom (25%),
GTE, ITT, and Plessey. Hewlett-Packard also has a significant
market share.
III.8.2 Competitiveness
US industry competitiveness varies across the industry, as follows:
* Military applications
US industry enjoys protected access to DOD R&D funding and
high technology procurements (foreign participation is less
than 1%). This near monopoly of the western worlds largest
military market has sustained a clear US lead. This lead
arises in technology rather than production economies - some
of the most important breakthroughs have . been made by small
firms. In this respect, the US has an advantage both in the
amount of capital directed towards R&D, and in the fact that
centralised procurement avoids wasteful duplication in basic
research and in the development of competing systems.
* Industrial, scientific, medical and commercial applications
The large size and sophistication of the US market has enabled
US manufacturers to develop a lead in applications where the
market elsewhere is as yet limited. However, there is no
evidence that US manufacturers of the more common systems are
either more efficient or technologically advanced than their
807 -
273
Appendix III (contd)
major competitors. In such a diverse and fragmented industry,
it is difficult to be precise in making comparisons. However,
the balance of opinion suggests that of EC manufacturers, the
British and Germans are the most competitive with the USA.
* Telecommunications applications
Unlike other types of laser, volume is a critical factor in
determining the unit cost of manufacturing semi-conductor
laser diodes. Economies of scale arise in spreading R&D and
marketing costs across greater output. Labour, p 1 ant and
machinery costs are relatively unimportant. Since the US
accounts for 60% of the world market (albeit declining), US
manufacturers have historically been able to develop a price
and technological advur.tage over the competitinn.
the gap is narrowing for the following reasons:
Howevi:!r,
- 80% of sales are to telephone companies (or
telecommunications equipment suppliers), hence exports to
Japan and Europe have been limited. Preferential
procurement policies by EC PTTs have provided an umbrella
under which indigenous firms which manufacture lasers as
well as cabling systems have sheltered and gradually
improved efficiency
- the mclrket is now growing faster in the EC than in the US
(at ctbout 40% per annum) and will soon provide EC
manufctcturers with a domestic market equal in size to the
us
- EC governments, especially the UK, France and Germany, have
targeted the industry for R&D support
EC manufacturers, notably Plessey, are gaining experience
in the US market.
- 808 -
274
Appendix III (contd)
US industry specialists identify Plessey and Siemens (and to a
lesser extent Cable and Wireless, Alcatel, STC, and AEG-Telefunken)
as major potential threats, particularly if they come to dominate an
open European market.
III.8.3 Impdct of internal market factors
The US industry has benefited from the fact that applications
markets grew earlier than in Europe and hence markets were bigger.
There is no evidence that public purchasing restrictions within the
EC put EC producers at a disadvantage - producers c 1 aim that the
market is open, except in France. In this field there is no strong
evidence that, up to now, EC firms are uncompetitive or technically
less advanced than US firms, but this may change as a result of the
massive SDI research programrne.
111.9 Tariff Rates
A comparison of EC and US tariff rates for selected products in 1987
is shown in Table III.9.1.
809 -
Appendix
275
III (contd)
TABLE 111.9.1 - EC AND US TARIFF RATES ON SELECTED PRODUCTS 1987
Produ,ct European us Difference
Tariff (1)(3) Tariff (2)(3) (US-EC)
Steam coal Free
I
Free 0.0%
I
Boiler (power station) 5.5%
I
6.5% 1.0%
I
Steam turbine 5.0%
I
7.5% 2.5%
I
Mainframe computer 4.9%
I
3.7% -0.8%
I
Telephone 7.5%
I
8.5% 1.0%
I
Telephone exchange 7.5%
.I
8.5% 1.0%
I
Electric locomotive 4.9%
I
3.9% -1.0%
I
L a s ~ r (non.-diode) 6.5%
a "of
J \.ItO 2. ~ ~
Sources: Tariff Schedules of the United St.'\tes Annotated ( 1987)
Tariff Scheaules of the United Kingdom (1987)
Notes: 1 Tariff item definitions currently vary slightly within the
EC, causing slight rate variations between countries.
Typical rates have been chosen.
2 US charges much higher rates than shown, for imports from
some communist countries.
3 Imports from GSP countries and certain other LDCs, are
generally exempt duty for the products shown.
811 -
APPENDIX IV - ACKNOWLEDGEMENTS
Case Study Intervi!!!
Belgium
Kempense Steenkolenmijnen
Cockerill Mechanical Industries SA
ACEC (Ateliers de Construction Electriques de Charleroi)
SA Philips/Philips and MBLE Associated
BTM (Be 11 Te 1 ephone Manuf act uri ng Company NV)
ATEA NV

CBL Optronics
BN SA
France
Framatome
Jeumont-Schneider
Groupe Bull
Matra Ericsson Telleconmunication
Matra Conmunication
Alcatel - CIT
Germany
Ruhrkohle AG
Deutsche Babcock
Steinmuller
BBC AG
AEG Kanis Gmbh
KWU
276
- 812 -
277
Appendix IV (cont'd)
MAN
Siemens AG (Data Systems)
Nixdorf Computer
Comparex
IBM Deutschland
Siemens AG (Telephone exchange equipment)
Telenorma
Zeiss
Leitz
Orden stock
Krauss Maffei
Italy
Ansa1do Termcsud
Ansaldo Componenti
Sulzer Italia
Fiat Aviazione/Fiat Termomeccanica Nucleare
Franco Tosi spA
Italtel
FACE
FATME
Associazione Nazionale Industrie Elettrotechniche ed Elettroniche
IBM - Italia
Honeywell - Bull
Fiat Ferroviaria
Ansaldo Trasporti
Breda
Valfivre
813 -
Appendix IV (contd)
UK
Babcock Power
NEI Plc
NEI International combustion
Foster Wheeler Power Products Ltd
GEC plc
GEC Energy Systems
GEC Turbine Generators
NEI Parsons
ICL PLC
IBM UK
Plessey
GEC TelecormlUnic:ations
.JK Lasers
Plessey Optoelectronics
Ferranti Electronics
Brush Electrical Machinery
GEC Traction/Transportation Projects
278
5 -
279
APPENDIX V - BIBLIOGRAPHY
US Department ,of Commerce, US High Technology Trade and
Competitiveness (Department of Commerce : 1985)
US Department of Commerce, An Assessment of US Competitiveness in
High Technology Industries (Department of Commerce : 1983)
Joint Economic Committee, Congress of the United States, Technology
and Trade : Indicators of US Industrial !novation (GPO : 1986)
Congress of the United States Congressional Budget Office, Has Trade
Protection Revita.lised Domestic Industries? (GPO : 1986)
US Department of Coronerce, A Competitive Assessment of the US
Software Industry (GPO : 1984)
Department of Conmerce, US Industrial Outlook, 1984, 1985, 1986
Energy Information Administration, Inventory of Power Plants in the
US, 1985 (Department of Energy : 1986)
Committee on Interstate and Foreign Commerce, US House of
Representatives, International Electrical Association : A Continuing
Cartel (GPO : 1980)
US Department of Commerce, A Competitive Assessment of the US
Electric Power Equipment Industry (GPO : 1985)
Energy Information Administration, Coal Production 1985 (Department
of Energy : 1986)
- 816 -
280
Appendix V (contd)
US Department of Commerce/Coal Exporters Association, Coal in the
United States (GPO : 1987)
Energy Information Outlook for US Coal Imports
(Department of Energy : 1986)
Energy Information Administration, Annual Energy Review 1986
(Department of Energy : 1987)
Energy Information Administration, Annual Outlook for US Coal 1987
(Department of Energy : 1987)
US Department of Commerce, A Competitive Assessment of the US Fiber
Optics Industry (GPO : 1984)
US Department of Conmerce, A Competitive Assessment of the US
Digital Central Office Switch Industry (GPO : 1986)
US Department of Contnerce, The Telec011111Unications Industry (GPO
1983)
US Department of Corrmerce, National Telecommunications and
Information Administration, Issues in Domestic Telecommunications
Directions for National Policy (GPO : 1985)
Bureau of the Census, 1985 Annual Survey of Manufacturers
(Department of Commerce : 1986)
US Department of Commerce, Current Industrial Reports, 1986
US Department of Commerce, The Computer Industry (GPO : 1983)
US Railroad Administration, Annual Survey 1986
317 -
281
Appendix V (contd)
Congress of the United States, Office of Techno 1 ogy Assessment,
US Passenger Rail (GPO : 1983)
Annual Reports
* Combustion Engineering, 1986
* Babcock & Wilcox, 1985
* Hewlett-Packard, 1986
* Cray Research, 1986
* Westinghouse, 1986
* Sperry, 1986
* General Electric,-1986
* General Motors, 1986
* GTE, 1986.
House of Commons Energy Committee, The Coal Industry First Report
( HMSO : 1987)
Bank Brusse 1 s Lambert, Change in the European Tel&onmunications
Industry, Report from Bru sse 1 s 146, "1986
.. Industry Brief : Princes and Pumpkins at the Digital Switching-
Hour .. , The Economist, Aug 29th 1987
Financial Times SllJrvey, .. Telecommunications .. , Financial Times,
December 1st 1986
- 818 -
282
Appendix V (contd)
11
High Technology .. , The Economist, August 23rd 1986
11
0pen Markets in Telecoms .. , Financial Times, March 31st 1987
.. System X : The Failure of Procurement .. Centre for Business
Strategy, London Business School 1987
Plessey, Report and Accounts 1986
Plessey, Report and Accounts 1987
Plessey, The Height of High Technology, 1987
Westinghouse Brake & Signal Company, Directors Report and Financial
Statement, i9S6
Hawker S i dde 1 ey, Annua 11 Report and Accounts 1986
Ferranti, Annual Report and Accounts 1986
Lumonics, Profile, 1986
STC, Annua 1 Report 198Ei
British Railways Board, Annual Report and Accounts 1985/86
British Railways Board, Annual Report and Accounts 1984/85
ICL, Report and Accounts 1986
IBM, 1986 Annual Report
IBM UK Holdings Ltd, Annual Review 1986
~ 9 -
283
Appendix V (cont'd)
NE I , Annua 1 Report arrtd Accounts 1986
NE I, Management Strutcture and Products, 1987
Babcock International plc, A Company Profile, 1984
GEC, An Introduction to GEC Transportation Project Ltd and GEC
Traction Ltd, 1986
GEC, GEC Traction, 1986
GEC, Annual Report 1986
821 -
- I -
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